Sunday, April 03, 2005

The Risk Not Taken

NY Times
April 3, 2005

The Risk Not Taken


ELIOT SPITZER, the New York attorney general, has made a career out of spanking arrogant fat cats on the front page. We cheered when he busted those shifty stockbrokers for selling us shares of Enron and WorldCom, and we hailed him for exposing those money managers who sold our mutual fund shares on the cheap after 4 p.m. Eastern to influential big boys at our expense.

Then last year Mr. Spitzer went after insurance companies, and everybody applauded again. Of course! Talk about a target-rich environment! For weeks, we opened our newspapers eager to read about insurance companies finally getting put to hammer and tongs for not paying claims, for denying medical coverage to cancer patients because of pre-existing conditions, for issuing policies with 50-page declarations and addenda that carefully spell out all of the losses for which the companies will not pay.

Instead, Mr. Spitzer abruptly lost his common touch and announced that he was investigating something called "contingent commissions" in the commercial insurance business. Huh?

That was our first inkling that this man on horseback might be a Man of La Mancha on a windmill hunt. After all, commercial insurance companies involved in bid-rigging - and even those that aren't - have battalions of litigators on retainer to attack and defend, pillage and plunder one another's coffers, and hang their rivals' fiscal heads on spikes outside their gates. Aren't attorneys general supposed to be lawyers for us lawyerless little guys?

Now, instead of moving back down the insurance food chain where the rest of us suffer - I have some dependent health insurance claims I'd love to see paid - Mr. Spitzer has cast his eyes on the very summit: On April 11, he and other financial regulators will be questioning the Wizard of Omaha, Warren Buffett, about possible financial manipulation at several giant international insurance companies, including American International Group and General Re, a subsidiary of Mr. Buffett's Berkshire Hathaway. (Disclosure: I sometimes help write skits for the Omaha Press Club show, in which Mr. Buffett has occasionally appeared. His ad libs get bigger laughs than my scripts.)

Granted, a Spitzer-Buffett bout might bump Michael Jackson's trial off the top of the news hour for a day or two, and Mr. Spitzer must think big, because he wants to be governor. But now his reach has officially exceeded his grasp. Investigating insurance companies is one thing, but reinsurance companies? What the heck is reinsurance? And isn't questioning Warren Buffett about the reinsurance industry a bit like asking Stephen Hawking about black holes and white dwarfs?

Let's go to this newspaper's business section for an explanation of the skullduggery that transpired: "The issues under inquiry are whether reinsurance companies controlled by A.I.G. were treated as separate entities in order to help hide A.I.G.'s exposure to risk; whether reinsurance transactions are tantamount to loans that should have been so listed; whether assets and liabilities were swapped to smooth earnings; and, finally, whether A.I.G. used finite reinsurance to smooth earnings."

Uncross your eyes and note the distinct absence of outrage.

I'm certain that Mr. Buffett understands this finite reinsurance lingo, but I fear for Mr. Spitzer if it comes to a contest of reinsurance wits bandying provisos back and forth. My prediction is that the entire scandal will vanish when the regulators get to Page 782 of the provisions governing the reinsurance contracts, where Paragraph LXIXII(A)(4), Clause (iii), colors the word "risk" a murky shade of gray and renders the entire investigation a publicity stunt within the meaning of Paragraph XXXVI(B)(3), Clause (vii). But by the time that document is parsed, Mr. Spitzer will be in his fifth term as governor and thinking about running for president.

Maybe I'm just a sucker for a demagogue, but I'd rather have Mr. Spitzer start small and initiate a full-scale investigation into how an insurance company in St. Paul can issue a policy promising (with a perfectly straight font face) to pay for direct loss to a building resulting from the eruption of a volcano, and then three paragraphs later state that it will absolutely not pay for water damage from a frozen pipe. Just what sort of industry is it that thrives by taking our premiums and promising to pay us money, but only if we die?

If Mr. Spitzer started out by investigating regular old insurance companies first, he could use the experience as a kind of warm-up for the mind-numbing denial and bureaucratic obfuscation that will surely greet his foray into the reinsurance industry. He could still start right here in Omaha, if he liked, but instead of going after Mr. Buffett, Mr. Spitzer could take a look at an insurance situation closer to home: my own.

Here's an actual paragraph from my homeowner's insurance policy (issued by Farmers Mutual Insurance Company of Lincoln, Neb.): "If at the time of loss there are no detached structures, the limit of liability shown for Coverage B shall be added to the limit of liability under Coverage A. If the replacement cost of all detached structures totals less than the limit of liability for Coverage B, the excess amount shall be added to Coverage A, and the sum of the two shall be the company's limit of liability under Coverage A. However, this shall not increase the limit of liability for Coverage C or D."

While Mr. Spitzer is busy interrogating Mr. Buffett about finite reinsurance, the author of this infinitely unreadable paragraph is still running around the streets of Lincoln. Will he strike again? And who will protect us from his next inscrutable injustice?

Richard Dooling is the author, most recently, of "Bet Your Life," a novel about insurance fraud.