In what is shaping up as a major piece of financial and political news, AM Best issued their mid year index of the publicly traded insurance markets, published in the Best Week, June 30th issue, and it shows a staggering $396 billion in market capitalization wiped out since January 1 of 2008.
This issue was first raised by John Darer, the blogger behind the Structured Settlements 4 Real blog. You can read his entire post here. I also plan on having John on Speaking of Settlements this Thursday to discuss the implications of this unprecedented evaporation of market capitalization, it's impact on the insurance industry, but primarily its impact on the world of personal injury cases, claims and settlements.
The headline of this post, " Making money the old fashioned way in the insurance business by not paying claims" is one of my favorites. It was first used by Andrew Tobias in his classic book, " The invisible bankers" and was a critique of John D. MacArthur, the notoriously cheap and ethically challenged insurance tycoon who started and built a massive insurance empire during the early and middle parts of the 20th century. It referred to the fact that MacArthur, when his firms were in a cash flow crunch, would send down the order to the claims department that no further claims were to be paid, that all cases were to be contested and to turn off the spigot. Never mind the cases or claims were legitimate, John D. knew that simply sitting on claims was the single most effective tool for conserving cash until sales or reserves rebounded sufficiently to build up the cash coffers again.
Now, I'm not suggesting that this market capitalization reduction is going to lead to financial catastrophe. It is after all the market capitalization of the firms stock, not it's reserves or cash positions. However, those of us with some gray hair remember similar market cycles in the past in which the word went out to claims departments to run out the clock on cases and negotiations, all with an eye toward sitting on cash until market conditions improved.
My conversations with trial lawyers and settlement professionals from around the country indicate we are about to enter a very challenging period of time for the legal and settlement professions. The combination of tort reform laws passed in the last 3-5 years has impacted the number of cases filed, particularly medical malpractice cases, the judiciary is understaffed and under funded in many states, causing log jams of cases and procedural delay. Most of the casualty markets have a concerted policy of delaying cases, making low ball offers and running out the clock to squeeze under funded trial lawyers and now, in my opinion, we are about to see a large scale squeeze at the casualty claims level to hold on to cash that is going to only make this situation worse.Bottom line, is if you are a trial lawyer or a settlement professional, you better build up your cash reserves, settle the cases you can for the best you can get and prepare for a period of belt tightening and expensive trials.