INSURANCE: GEICO at the Brink

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Backstop Scheme. Some insurance officials feel that D.C. Superintendent Wallach let the situation drift too long before taking action. Says one executive: "It's inconceivable that a company of GEICO's size could run up such a loss in one year without Wallach saying 'Hey, fellas, what's going on here?' " In May GEICO directors ousted Chairman Norman L. Gidden, 59. New Chairman John J. Byrne, 44, has pulled GEICO out of New Jersey—a dismally unprofitable state—and pledged to trim by 20% the 2.4 million auto policies in force (there are 400,000 homeowner policies too). Byrne is also eager to get rate increases wherever possible; even before his arrival, GEICO had won a 40% increase in New York.

If GEICO should nonetheless go under, policyholders would have from 30 to 60 days, depending on their state, to find another insurer. Most would lose some part of the premiums they have already paid to GEICO. Claims against GEICO would be paid out of state-run insurance guaranty funds, which are empowered to assess other insurance companies up to 2% of their premium income. Those companies would then divide GEICO's assets — if any were left.

Since insurers are far from eager to be assessed to pay GEICO's claims, they may yet band together to save the company. Wallach and GEICO officials could conceivably soon decide to consider the reinsurance scheme a success if only 30% of the premiums are taken over. There is also a slim chance that the D.C. Department of Insurance may exercise its legal right to take over management of GEICO, though Wallach has not yet suggested it. Whatever happens, the fiasco could well rekindle congressional interest in setting up a federal body to insure insurers the way the Federal Deposit Insurance Corp. guarantees the safety of bank deposits. Efforts to set up such a backstopping scheme have never made much headway, but the largest failure in insurance history—or even a cliff-hanging escape—would dramatize the need as nothing else has done.