The agency that became the fiscal conscience of health-care reform isn't getting as much attention from a recent report on potential disasters looming in the insurance industry.
America's insurance crisis has become the ticking time bomb that could wipe out President Clinton's economic recovery. If some of the scenarios in a recent congressional report come true, it could put a drag on the domestic economy similar to the savings and loan fiasco.Yet a recent doomsday report on the costs and consequences of a solvency crisis in the insurance industry sunk as quickly as it appeared.
In the last decade, insurance insolvencies have more than tripled, with more than 200 companies going belly up in 1991 and 1992 alone. A combination of poor management, natural disasters and an uneasy real estate market have left many once-healthy companies struggling to pay off mounting debts in a relatively saturated market.
According to the Congressional Budget Office report, the deteriorating condition of many state insurance systems has created a unique vulnerability to natural disasters.
Between 1989 and 1992 insurance companies paid out more than $38 billion to the victims of natural disasters like hurricanes and earthquakes, with more than 40 percent of that total due to Hurricane Andrew in South Florida.
That hurricane, which leveled entire towns in the area south of Miami, led nearly a dozen insurers into insolvency. If a hurricane with the force of Hurricane Andrew hit Miami today, damages could top $50 billion.
Part of the problem, the CBO argues, is that the competitive pressures of the past decade led many insurers to pursue riskier strategies than in the past.
Rather than relying on underwriting for a stream of steady profits, many companies began relying on asset markets to stay in the black. Commercial real estate ventures, junk bonds and other risky investment strategies were a source of quick profits for many companies.
When these markets collapsed during the late 1980s, so did many of the life insurers that were leveraged to the hilt in these markets.
Although regulators have tightened the reins in recent years, the robust economy has not yet fully caught up with many insurers.
Despite its problems, the insurance industry remains one of the most deregulated financial markets in the country. With regulation decided on a state-by-state basis, policyholders are left to depend on their individual state guaranty system in case their insurer fails.
The result has been a patchwork system where some states overregulate while others leave their policyholders exposed to failure.