Automotive industry may be leading way back to better times

Rough Notes, Jun 2000 by Behnke, E C

THE "silver lining" begins to show. In the past six months business men of every type and calibre have been having a re-birth of the self-reliance, audacity, initiative and resourcefulness which enabled our forefathers to conquer this continent. They are finding adversity not lacking in opportunities for those who deserve to win, and the fighting spirit is growing stronger every day. Day by day more men in finance, industry and trade are scrapping the policies, plans and methods which were good enough in an era of extraordinary prosperity, and evolving new ideas and new products and going into action with a vigor that is changing red ink into blue and will make it black when they get under way.

More for the Money

The automotive industry has played, and will continue to play, a distinguished part in the battle against the depreslion. With profit margins already low, manufacturers have scaled down their lists, making them the lowest in history. This reduction in price has not been accomplished by cheapening the product in any way, for the automobile purchaser is now buying his cat for less money than ever before, and getting a vastly improved machine. Manufacturers have added to their cars every conceivable gadget that will contribute homeowners business," he said. "And, we have many other companies that have continued to take the approach of avoiding writing homeowners insurance by making sure that their premiums are too high."

Now the IIAA is apparently going head-to-head with The Cincinnati Insurance Companies over the issue. The IIAA says that The Cincinnati has been writing to agents expressing its opposition to HR 21 (S 1361 in the Senate). In a letter to John J. Schiff, Jr., chief executive officer of The Cincinnati, the IIAA says: "Once again, The Cincinnati Insurance Companies has written to independent agents concerning IIAA's support for legislation that will assist agents in coastal, earthquake and other disaster-prone areas. While we certainly respect the right of The Cincinnati Companies to express an opinion, we cannot leave unanswered the many misrepresentations contained in your correspondence."

The IIAA letter continues: "First Cincinnati continues to misrepresent the trigger levels for reinsurance under HR 21. According to the bill, the trigger for federal reinsurance in any region of the United States shall be the greater of a 1-in-100 year event, a level between $2 billion and $5 billion of residential insured losses on an amount that exceeds the present market capacity of the private reinsurance markets. Using these standards, the trigger for federal reinsurance in Florida is likely to be $20 billion, not the $2 billion suggested by the Cincinnati. The same is true for virtually every other region of the Continental U.S., each of which is likely to have reinsurance trigger levels well in excess of $2 billion."

The IIAA maintains that all who are working on the bill know that the $2 billion minimum will apply only to isolated regions with small populations such as Hawaii and Alaska, yet "The Cincinnati continues to suggest that this standard will be used nationwide in an effort to deliberately confuse the issue."

The agents' association says that Cincinnati, in its letter to agents, maintains that the insurance industry's $330 billion surplus is further reason to oppose a federal reinsurance program. "By Cincinnati's logic, an industry with $330 billion can easily afford a $20 billion or $30 billion catastrophe," says the IIAA. "What Cincinnati fails to mention is that the bulk of this surplus is owned by insurers that write little, if any, homeowners insurance and would have nothing to do with claims arising out of an earthquake or hurricane. Residential losses of $10 billion in Florida after Hurricane Andrew, $1.5 billion in Hawaii following Hurricane Iniki and $7 billion following the Northridge Earthquake were enough to send each of these insurance markets into a tailspin from which they have yet to recover. The notion that even larger events would do no harm to independent agents and the companies we represent is simply wishful thinking," says the IIAA.

The agents' association goes on to point to what it believes are other inconsistencies in The Cincinnati's letter to agents, but the point is made.

The business of insurance is choosing sides over HR 21 and its Senate counterpart and the fighting is likely to become even more fierce. Simply stated, one side says that it opposes federal encroachment into the insurance industry through a federal reinsurance program, alleging that the industry is capable of providing the reinsurance protection itself. On the other side, proponents of HR 21 say if the industry is capable of providing the reinsurance, why isn't it doing so right now and allowing homeowners markets to open up in catastrophe-prone states?

Opponents of HR 21 also say that paying for a federal reinsurance program such as this would be unfair to states that are not catastrophe-prone. But Brown counters that all Americans share the cost of disaster relief. "Any money that we can eventually save in future disaster relief will reduce the tax burden of all taxpayers. The best way for Congress to shift the burden for paying for disaster relief to those who receive it is by making sure that Americans in disasterprone states have the ability to purchase homeowners insurance and thereby prepay for the assistance they will receive from their insurance companies."