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With insurance-investigation bonfires burning brightly across the country, 2005 is packing some heat. Risk executives with an appetite for keeping public officials on their toes--or is it the other way around these days?--may over the next 12 months want to keep their eyes and ears peeled to the following issues:

Staying out of jail. Top executives at large insurers and brokerages have hurriedly been hiring their own personal attorneys, in addition to corporate counsel, a source with reputable contacts in the insurance industry told Risk & Insurance®.

In addition, some risk managers are contemplating hiring their own attorneys to accompany them to meetings called by top management asking them to explain and defend the corporate insurance practices they have signed off on.

This possibility, say well-placed industry sources, has been vigorously opposed by the top executives. In one case involving a Fortune 500 corporation, when the company's risk manager informed his bosses that he was planning to bring his own lawyer to a review of the company's insurance practices, he was told that such an action would lead to his prompt dismissal.

Also on the "worried list," of course, are any board members, accountants, consultants and representatives at client companies, among others, who have relations with brokers or insurers suspected of questionable practices.

Thousands, maybe tens of thousands, of heads rolling in industrywide job cutbacks. Within short order after Michael Cherkasky took over as CEO of Marsh & McLennan Cos. last fall, he cut loose 3,000 or so employees (or five per cent of its workforce), and he said at the time that further layoffs might be necessary.

Like Marsh, it will be all but impossible for the biggest brokers to find new revenue sources significant enough to replace the huge amount of income they formerly gained from so-called "contingency commissions" that most of these companies have now eliminated under pressure from law enforcement agencies and insurance regulators.

Which leaves the only proven option available to substantially improve the corporate profit margin: cut jobs, as many of them as possible. The same is true at insurers as industry experts predict modest growth in premium income at best.

A rising flood of lawsuits from angry institutional and individual shareholders, and commercial and individual policyholders. Overnight, in the immediate aftermath of civil charges filed against Marsh & McLennan last October, share prices of most insurance giants dropped sharply. In some cases, stock prices of various large insurers have started to rebound, but the stocks as a group have been badly damaged, with little hope for a return to the patterns seen in the past five years or so.

It's cold comfort to shareholders of Aon Corp. to know that the company's former CEO, Patrick G. Ryan, has lost half his stake, estimated at up to $800 million, in the financial services behemoth, one insurance industry analyst dryly observed.

Further threatening the stake of these wounded shareholders, is an array of up-in-arms consumer groups, and a phalanx of looming class-action lawsuits arising from aggrieved client businesses and policyholders. Web sites for some class-action law firms currently are searching for complainants. As one attorney put it, "This creates a lawyers' full-employment act."

Intensifying discussion of some form of federal regulation. This talk had been gaining wider attention in recent years, but still had largely remained an issue without any underlying urgency driving it. Now, with state law enforcement agencies and insurance regulators roused to a new level of activism in the aftermath of charges filed last fall by New York Attorney General Eliot Spitzer and New York Insurance Department Superintendent Gregory V. Serio, a more serious and extensive discussion of potential federal regulation seems likely to be a regular part of industry conferences and association gatherings.

Heat from many important quarters for better industry self-regulation. Ditto for stronger internal compliance controls at companies throughout the insurance industry. Don't be surprised if Spitzer, who has announced his intention to run for governor, weighs in on both these issues this year.

When Spitzer and his office were well into a highly publicized investigation of conflicts of interest at the largest brokerage firms on Wall Street, he said at a question-and-answer session at Baruch College in New York: "One of the stories that hasn't emerged yet as completely as it should, I think, is that self-regulation has been an abysmal failure.

An absolute, abject, complete zero. One of the important things to be considered in reconstituting the system (on Wall Street) is that the unalloyed faith we were asked to place in self-regulation and internal compliance simply doesn't appear to have been justified."

"I'm not trying to craft an answer right now," Spitzer added, "but I will tell you that I think it is a piece of this that hasn't yet been sufficiently appreciated because it certainly bears on where we go next."

The prospect of the Terrorism Risk Insurance Act expiring on December 31. This U.S. Treasury Department-backed program, enacted by Congress in the fall of 2002 with the antiterrorism insurance market still in a state of upheaval following the events of Sept. 11, has provided an invaluable ballast for insurers who were mandated to offer some form of antiterrorism insurance. At this point, industry oddsmakers are betting against an extension, largely because such an extension lacks prominent congressional backers.

U.S. Treasury backing for current TRIA coverage policies run in the billions of dollars. However, several leading authorities on antiterrorism insurance believe that providing such coverage is quietly reverting to the traditional, pre-Sept. 11 mode of antiterrorism protection being included in an all-risk policy, or as a war exclusion.

Further, Lexington Insurance Co. has begun to aggressively market a huge antiterrorism insurance package that allows buyers to mix and match among four coverage options.

Expect the revolving door of inquisitive investigators to spin even faster. "Not only do we have to deal with Spitzer and state regulators, but now we have to contend with the Securities and Exchange Commission, the Justice Department, and the FBI," said a top executive at a large New York-domiciled insurance company. "And, of course," he noted wryly, "we just went through our worst hurricane season in years."

Which brings to mind one positive hope for 2005: May it be a year untouched by any catastrophic natural disasters.

STEVE YAHN, a veteran journalist and contributing editor, writes frequently for Risk & Insurance®.

January 1, 2005

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