Analysts On The Impact

Bear Stearns analyst Saul Martinez says it is too early to make informed decisions about the impact on life insurers. “Headline risk” could weigh on share prices and affect the growth and profitability of some insurers, according to Martinez, but in some cases, it also has led to sell-offs that are “overdone.”

“It is hard to justify a sell-off of these stocks at these values. But, there could be an overhang for a while,” he adds.

When asked about life and health insurers risk from lawsuits, Martinez replied that “theoretically, there is a legal risk if these allegations do prove correct.” But, he continues, his sense is that compared with commercial lines, in the group benefits business “there is a lot less room for manipulation and bid rigging.”

It is more difficult in the group benefits market to engage in alleged activity such as price rigging because of thinner price margins and disclosure requirements that include disclosing investment retirement assumptions and mortality assumptions, Martinez says.

The bidding process is fairly competitive and while it is possible there could be manipulation, the process is more “transparent,” he adds.

Depending on the results of the inquiry, Martinez says, there is the potential for brand damage, although he adds that for companies with very large presences in the group market, there would have to be “pretty egregious behavior.”

If the investigations under way extend beyond group benefits and look at life insurance products, in general, then potentially products such as variable annuities and transactions such as 1035 exchanges could be examined, Martinez says.

Andrew Kligerman, an analyst with UBS, New York, says the existing brokering process for group benefits could provide opportunities for abuse or wrongdoing. Potential abuses, he says, include: override arrangements; a volume-based payment to the broker; quid pro quo behavior that could motivate business to select underwriters; providing an incumbent insurance company with an idea of what price, terms and service levels need to be to win renewal; and, discretion over what carrier is given a last bid, a bid that is usually selected.

Jim Connolly


Reproduced from National Underwriter Edition, October 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.