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1980s liability crisis forged better market


THE CONSENSUS among a wide range of experts is that a repeat of the mid-1980s liability insurance crisis is unlikely.

We agree and, as we report in a special package that begins on page 1, there are several reasons that make the commercial insurance market very different than 25 years ago, when rates soared and coverage was impossible to obtain at any price in some cases.

For starters, badly burned insurers and reinsurers increased their scrutiny of the risks they underwrite. Less prevalent are practices such as cash-flow underwriting in which rates charged had little, if any, correlation to the risk being insured. Such insurers focused solely on how much investment income could be generated from premiums.

The folly became obvious when investment income earned on rock-bottom premiums didn't come close to covering losses. Buyers subsequently paid for insurers' irresponsibility in the form of huge rate hikes. Some insurers paid an even higher price: They failed.

Buyers also learned some lessons. Many formed policyholder-owned insurers, with the aid of brokers. These insurers relied less on reinsurance and concentrated on their own underwriting practices.

Buyers used their collective muscle to win changes in law, making it easier for them to launch captive insurers, injecting more competition and capital into the market. In some markets, such alternatives have grown so large and command such a significant share of the market that they no longer can be considered alternatives.

For those badly burned 25 years ago, there is consolation that the crisis truly led to vital, long-lasting market reforms.