THE FUNDAMENTAL PROBLEM

NEW YORK-The fundamental problem plaguing domestic property insurers is that premiums for catastrophe-prone property, primarily residential property, are inadequate compared to potential losses on those risks, several insurer CEOs say.

Congress may well put taxpayer funds into a reinsurance program to help pay losses. And capital markets may soon offer more protection. But until insurers address the fundamental problem of low prices, such remedies would be only Band-Aids, said one chief executive officer.

Low rates and premiums on houses in disaster-prone areas are the most obvious catastrophe-related problems for insurers, said Ronald E. Ferguson, chairman and CEO of General Re Corp. in Stamford, Conn., during a panel discussion last week at an Insurance Services Office Inc. meeting.

"We're not dealing with the fundamental problem," said Mr. Ferguson. "There's only about $2.5 billion in property premiums coming out of Florida," where the exposure easily exceeds $50 billion.

"Homeowners insurance isn't, and never has been, profitable," added William R. Berkley, chairman and CEO of W.R. Berkley Corp. in Greenwich, Conn. "But if you were to get the pricing mechanism right, you'll solve the problem. People won't build on the beach if they know they'd have to pay 10 or 12 times what they're paying now."

But simply hiking rates on coastal and California homes isn't an option, said D. Richard McFerson, president and CEO of Nationwide Mutual Insurance Co. in Columbus, Ohio. "Regulators won't let us.*.*.but they should. People who choose to live in a high-risk situation should pay for that choice."

Dennis H. Chookaszian, chairman and CEO of CNA Insurance Cos. in Chicago, reiterated what many have been saying for several years: Personal lines, not commercial lines, losses are killing the industry.

"If you could get homeowners pricing corrected, you'll solve most of the problems. But doing so is politically unpopular," he said.

But, "some would be happy to pay three times more, when it should be 10 or 12 times," Mr. Berkley said.

But image is still important, two executives said. "We can't be perceived as if we're gouging the public. There is a PR side to this," said Mr. McFerson.

Pushing for higher rates for disaster-prone areas will never be easy because the public perceives such business as far more profitable than it really is, said Douglas W. Leatherdale, chairman, president and CEO of The St. Paul Cos. Inc. in St. Paul, Minn. "We've failed to explain that this isn't a high-rate-of-return industry. Our margins can be small."

In an odd way, the recent losses may help the industry.

"Actuarially sound rates haven't been politically feasible, but we should still work toward that. With eight one-in-100 year events in the past five years, people may actually realize that there is a big risk," explained Robert T. Herres, chairman and CEO of United Services Automobile Assn. in San Antonio.

If higher rates are unattainable, higher deductibles and more mandatory self-insured retentions should be used, as they are on the commercial side, several executives said.

Another major factor affecting the industry is restructuring.

Mr. Chookaszian said restructuring will continue along three major lines: for financial reasons, for consolidation and for liabilities. "For the stock companies, more outside money that's geared toward quarterly results will continue to come in. You see it now with KKR, the Bass brothers and Insurance Partners. This is smart money," he said.

CNA's 1995 purchase of Continental Corp. and the more recent acquisition of Aetna Life & Casualty Co.'s property and casualty business by Travelers Corp. signal that restructuring for consolidation is heating up after years in which the only buyers of U.S. insurers were foreign.

"Until last year, the consolidation price was too high for domestic companies. Only outside insurers were attracted," he said.

On the liability side, Mr. Chookaszian pointed to the Zurich Insurance Co. purchase of much Home Holdings Inc. business, Kohlberg Kravis Roberts & Co.'s deal for Talegen Holdings Inc., CIGNA Corp.'s desire to split into two companies, one a runoff company, and Lloyd's of London's creation of Equitas Ltd.

The CEOs differed on their major concerns for the near future.

Mr. McFerson said managing Nationwide's exposure base and making sure the company is protected from catastrophes is his prime concern. Another top concern is improving its distribution.

Mr. Leatherdale said figuring out a way to "get the prices I need to keep the gap between pricing and loss trends sizably apart." Beyond that, he said, reducing St. Paul's expenses and improving productivity concern him. "I can affect these things more than I can loss trends."

Mr. Berkley said communicating to people what low interest rates in 1996 will mean to his company's bottom line is a leading concern. "Investment income is going to drop this year without better investment strategies." He also cited keeping up with information technology.

Mr. Chookaszian said CNA will be dedicated to reducing and managing environmental liabilities as well as tackling computer problems.

And Messrs. Ferguson and Herres said maintaining pricing amid heavy competition will be their leading challenges.

And into the next century?

"I want be the consolidator, not the consolidatee," said Mr. Leatherdale. "We're here in an industry that is going to continue to get smaller. This industry will be totally global in 10 years and I still want to be around."