National Catholic Report—Volume 7, Number 1, June 2003

Commentary on the State of the Insurance Industry
By Michael J. Bemi, President & CEO, TNCRRG

Some of our readers may have already completed their insurance program renewals earlier this year. Some of you will still be embroiled (probably a fair term to employ this year) in the process as you read our summer newsletter. In either case, it is likely that your renewal experience was, or will be, something short of what you really would like to have for your diocese or religious institute.

Three scenarios would be very typical. First, it may be that you couldn’t purchase as much limit of coverage as you would prefer—perhaps because it was unavailable, or alternatively, available but too expensive. Next, it may be that your coverage terms and conditions are not as broad as they used to be, and as you would like them to be, in order to really provide you with “sleep insurance.” Finally, it is very likely that you paid more for whatever coverage/limit you could get, and it is quite possible that you paid far more than you hoped to (although probably a good deal less than the renewal increase you experienced in 2002).

Why is this happening, particularly after the moderate premium increases of the 2001 renewal season and the massive premium increases of the 2002 renewal season? Aren’t the insurers and reinsurers returned to a financially “healthy” state? Or, is it that they are simply greedy and avaricious?

A fair answer would include the following considerations: 1) that the financial health of the industry has improved; 2) that some carriers are taking some advantage of market circumstances (arguably charging more than they need to); and 3) that for much of the industry, more uncertainty remains and much work needs to get done to assure the long-range financial viability and stability of the insurance marketplace.

Why is there such a high level of remaining industry uncertainty and instability? There are several legitimate explanations (note that these factors will not necessarily impact every insurer/reinsurer in an identical fashion or to an identical extent). These explanatory factors are:

1. While the industry has significantly increased pricing for a two-year period, the industry had in fact under priced its product for at least the preceding 10-year period (some would argue 12-year period).
   
   
2. The industry under pricing for 10 to 12 years was substantially offset by excellent investment returns in the same period; industry investment returns for the last three-year period have been poor, and were not nearly high enough to allow the two years of premium increases to really have the positive effect they would have had in the presence of accompanying solid investment returns.
   
   
3. Actual terrorism losses from the 9/11 tragedy have had a major negative impact on the reinsurance industry; meanwhile the terrorism threat remains as a very frightening, and possibly real, incalculable source of loss to insurers (even in light of the Terrorism Risk Insurance Act of 2002, which provides the industry a very limited federal “backstop” and which requires the insurance industry to eventually repay any amounts the federal government subsidizes after terrorism losses).
   
   
4. Post Enron, Tyco, WorldCom, Adelphia, etc., D&O (Directors’ and Officers’) losses have been enormous, and D&O litigation is increasing even though corporate governance issues have been getting very positively addressed by business, industry and nonprofit organizations.
   
   
5. Asbestos, environmental impairment, and toxic mold claims remain problematic for the industry, and have a long way to go before the industry can begin to “get beyond” these loss producing phenomena.
   
   
6. The general pace of litigation continues to expand at an ever-increasing rate, including in the realm of class action suits. This has led to an industry circumstance that in some coverage lines, the average cost of litigation far exceeds the actual amount of the average loss.

What can the Church do to respond to industry upheaval?

As a diocesan or religious institute fiscal officer or director of insurance and risk management, what can you do to protect the Church amidst all this insurance industry upheaval? Four excellent strategies can be employed to protect the Church during insurance marketplace instability (or any other nature of market for that matter). They are: 1) risk control; 2) claims management; 3) increased retention; and 4) use of alternative insuring mechanisms. A few words about each would be helpful.

Risk control entails loss prevention (preventing losses before they can occur) and loss control (reducing/mitigating the severity of losses you simply could not prevent). Good risk control will: 1) keep your insurance premiums lower no matter what the state of the market; 2) help your diocese or religious institute avoid all the indirect costs associated with losses (e.g., workplace disruption; loss of employee productivity; time spent with adjusters, contractors, architects, etc., after a property loss; time spent at depositions, answering interrogatories, meeting with attorneys, etc., after a liability loss; interruption of ministries no matter what type of loss); 3) preserve/maintain your organization’s ability to earn a dividend based on your loss experience (if your insurer pays dividends); and 4) help your organization to perform its ministries in a fashion that protects the people you serve, protects the property the Lord has entrusted you with, and prevents the disruption of your ministerial work itself.

Claims management is the process of resolving your organization’s claims in an expeditious, effective, just and moral manner—in other words, as good stewards of the gifts of the Lord. Employing good claims management techniques (like litigation planning and management, alternative dispute resolution, structured settlements, thorough claim/loss investigation, etc.) significantly reduces the ultimate cost of claims, while simultaneously effecting claim resolutions that provide justice for all parties involved. All this results in fewer dollars spent to settle claims, simultaneously producing better loss ratios and lower insurance premiums.

Increased retentions will invariably lower your insurance premiums. This strategy makes sense when: 1) you practice quality risk control; 2) you have a sizable body of loss data from which you can project your organization’s most frequent nature and size of loss; and 3) you have “free” or available cash flow that you can utilize to establish a loss fund from which you can pay your smaller, more frequent and more predictable claims. The theory is that it makes no sense to “trade dollars” with an insurer, paying the insurer premium dollars for losses that you can reasonably expect will not exceed the premium that you pay. Better to fund those losses internally, allowing you to control your organization’s cash flow and invest it to your diocese’s/religious institute’s benefit (as opposed to the insurer benefiting from investing your organization’s premium). A word of caution: do not attempt to retain catastrophic losses or you risk bankrupting your ministries in the event of a very major claim/loss.

Alternative insuring mechanisms are entities like captive insurance companies, self-insurance pools, risk retention groups, etc. which allow your organization to participate in an insurance program that is at least partly (perhaps entirely) owned and controlled by your diocese or religious institute. These mechanisms generally offer their owners more stable premiums, better coverage, ability to control underwriting profits, ability to control investment earnings, improved risk control efforts and improved claims management. The good news is that the Catholic Church already owns and operates several of these mechanisms (The National Catholic Risk Retention Group, Inc., is one), so there is an established and successful Catholic market for you to investigate if your diocese or religious institute does not currently participate in an alternative insuring mechanism.

There is one additional strategy that is not as consistently useful or readily adaptable as the four already mentioned; namely, you can always market or “shop” your diocese’s or religious institute’s insurance program. This is a viable and recommended practice to employ occasionally (perhaps every five years), because you can get “a feel” for the improved products/services/pricing the marketplace has to offer, and also, you can get direct evidence of how seriously your incumbent carrier wants to maintain your business. This strategy is not as adaptable or useful because it sometimes produces meager results. This is usually the case in an extremely unstable market, when carriers are “hurting” and are not so eager to compete for your business via special coverage/limit and/or pricing considerations. In any event, if you choose to market your program, guard against the temptation to opt for the cheapest price (premium), unless you are positive that the new program compares very favorably to your incumbent program on an “apples-to-apples” basis. Otherwise, you may do your diocese or religious organization a major disservice. For example, if you opt for a $100,000 premium savings and then experience an uncovered claim of $200,000, in an area of coverage that was included in your old program, you haven’t actually saved a penny—in fact, you have cost your organization $100,000.

Finally, keep in mind that it is folly to expect the insurance market to achieve a permanent fix, offering continual stability and providing easy predictability for insureds. The fact is that the insurance market is highly “elastic” (as an economist might say), providing relative ease of entry, a high degree of competitiveness, but also, an essentially uncertain “playing field” for participants, because of the very nature of losses. All of these factors lead ultimately to occasional market instability and related market “rebalancing.” Therefore, your diocese/religious institute will be best served and protected if you learn and consistently employ the strategies discussed herein.

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President’s Message

Throughout the year, 2002 presented National Catholic some daunting and adverse challenges. Nonetheless, at year’s end, National Catholic could display a broad array of very positive accomplishments and developments. Let’s first examine the challenges that confronted National Catholic.

Chief among these was the sexual misconduct scandal and crisis within the Church. This crisis actually produced negative "fallout" for National Catholic in several areas:

1. A dramatically increased frequency and magnitude of incident reports and actual claim reports;
   
   
2. Greatly increased underwriting scrutiny, and some significant underwriting restrictions, placed upon us by our reinsurer;
   
   
3. A deluge of press/media requests for interviews, information and explanations (note that all claim particulars/data was absolutely kept confidential); and
   
   
4. Tremendous pressure from dioceses to disseminate and implement our VIRTUS^® PROTECTING GOD'S CHILDREN™ program (which was inaugurated very early in February 2002) at a far greater than originally contemplated "delivery rate."

Simultaneously, the insurance marketplace and reinsurance marketplace were deteriorating rapidly and precipitously, with very large premium increases, accompanied concurrently by reductions in available coverage limits and restrictions of important coverage terms and conditions. The crisis in the Church actually exacerbated what was already a highly stressed insurance and reinsurance marketplace. Both our existent insureds, and also, other Catholic entities not currently insured by National Catholic, were coming to us seeking relief from "the storm."

Finally, as with the rest of America, whether commercial, industrial or household, our investments fell far short of their performance in 2001.

Just how did National Catholic respond to all of these challenges, and how ultimately did your company fare?

National Catholic provided the rate and premium stability that is part of our mission on behalf of the Church. While the marketplace was typically demanding 20% to 100% rate increases (dependent upon the type of coverage and the insured’s specific loss results), National Catholic responded with a 7.8% "across-the-board" rate increase. While the commercial carriers were reducing their available limits of coverage and significantly restricting coverage terms and conditions, National Catholic accelerated issuance of its increased policy limits option, while simultaneously expanding coverage terms and conditions. This "insured-centered" and directed performance benefited National Catholic with the addition of three new shareholders in 2002. We welcome the Archdiocese of Indianapolis; the Archdiocese of Portland, OR; and the Diocese of Birmingham. With the Archdiocese of Portland’s membership, National Catholic has now truly become a "coast-to-coast" operation.

Throughout the year, our Investment Committee, with the assistance of outside professionals and involvement of the full Board, reviewed in depth: National Catholic’s investment objectives; investment portfolio; investment managers; investment returns; and new investment options. We decided to "stay the course" with continuous monitoring, largely because National Catholic’s portfolio was considerably out performing our benchmark portfolio (2002 results for each were negative, but in absolute terms, National Catholic’s portfolio performed 1.3 percentage points better than the benchmark portfolio).

Meanwhile, our VIRTUS programs experienced "landmark" performance in 2002. The dissemination and implementation of PROTECTING GOD'S CHILDREN occurred at an extremely rapid pace. By year-end, 92 archdioceses/dioceses were either well exposed to, or already actively involved with, our child sexual abuse prevention program. Nation-wide, well over 2000 PROTECTING GOD'S CHILDREN program facilitators had been trained. Our VIRTUS Online™ service was fully inaugurated in August as an excellent and comprehensive risk control education, training, monitoring, communication and compliance tool. Our VIRTUS Phase II activities (violence prevention and mitigation) were also augmented substantially in 2002.

Finally, and even in light of the significant challenges and duress circumstances confronting it, through sound underwriting, excellent risk control and high quality claims management, National Catholic was able to post a $642,980 operating profit in 2002.

We are very thankful that our efforts were so blessed.

In closing, I want to thank all of our shareholders and friends for your support, confidence, and encouragement. Be assured that we will always do our very best to serve you and our Church.

Michael J. Bemi, President and CEO

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Consolidated Balance Sheets
The National Catholic Risk Retention Group Inc., and Subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

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Consolidated Statements of Operations
& Comprehensive Income
The National Catholic Risk Retention Group Inc., and Subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Protecting God’s Children^™ All Across America

From Maine to Nevada … from Montana to Florida … the Protecting God’s Children program is making an impact at dioceses all across the country. In the last nine months, 33 dioceses have implemented the program to the point of conducting Protecting God’s Children awareness sessions for adults on recognizing, reporting, and preventing child sexual abuse. Fourteen (14) more dioceses have signed contracts and are in the process of scheduling awareness sessions. Plus, another 30 dioceses are taking a serious look at the program and are expected to make a decision within a few weeks. We anticipate that, by the end of the year, close to one-half of the Catholic Church in America will be participating in one or more of the VIRTUS programs.

And, a lot of people are coming to depend on our programs as the best available source for continuing education on the prevention of child sexual abuse. That’s why our VIRTUS Online™ system brings so much value to this cause. In May, we had more than a million hits on our website (www.virtus.org), with a steady stream of visitors all hours of the day and night.

We are blessed to have so many shareholders and friends who actively use VIRTUS Online and our other VIRTUS programs and services. Together, we are making the world a safer place for children.