ART Becoming Market Of Choice Evidence showsthat many policyholders, large and small, have embraced alternativerisk and related products so wholeheartedly that in the UnitedStates alone an estimated $120 billion in premium has been movedfrom the traditional market to the alternative risk transfermarket.

|

Given that control is the reason most often cited as to why ARTis so popular, I doubt there would be significant return to thetraditional markets if and when pricing drops.

|

More captives, for example, were formed after the last hardmarket than during it. In fact, the alternative market nowcomprises half the insurance market. Since 1961 when the termcaptive was first used, $120 billion has moved from the traditionalmarket to the ART market.

|

But not everyone can migrate into the alternative market. Ifthey did, wed all be back to the same spot we were in before ARTwas in vogue. That is, wed once again be dealing with larger,bureaucratic insurance companiesonshore or offshorethat managelarge numbers of insureds through class underwriting.

|

So where does this leave the traditional market today?

|

If the hard market allows insurance companies to replenishcapital with premium increases, but the majority of policyholderselect to self insure, take large retentions, start captives, ortransfer only the catastrophic or aggregate risk to the markets,who will be left to pay the price increases?

|

Who will be left to make up the cumulative effects of largetoxic torts like asbestosis, mold, Sept. 11, 2001, cash flowunderwriting, recent poor capital gains, an unbalanced civiljustice process, investor unrest and the threat of war?

|

I contend, there are not enough policyholders to make up forthese shortfalls.

|

So what happens when recent pricing increases begin to moderate,or, as history often tells, the hard market exits as fast as itarrived?

|

We have witnessed and we will continue tosee large, well-known, national insurance companies suffersignificant downgrades from insurance rating agencies.

|

We've seen carriers withdraw from entire lines of business orgeographies, enter rehabilitation, or implement an exit strategy ata record pace in 2002. I expect 2003 to see even more.

|

This is a matter of such concern that a recent survey of topU.S. producers by the Council of Insurance Agents and Brokersrevealed that about 86 percent of those surveyed expressed concernabout insurer insolvency.

|

That same survey found that brokers and agents are increasinglylooking to use alternatives, like captives, to place business.

|

Despite getting 20-to-50 percent or more in premium increasesfrom their policyholders over the past few yearsstill a bargain ifyou believe some of the pundits comparing 2002 to 1993 problems arenot over for insurers confronting and dealing with the issues ofreserve deficiencies.

|

Besides the observation that the cost of capital in 2002 wasnever close to being covered by a comparable return-on-equity forthe property-casualty industry as a whole, for some carriers thechoice to replenish capital comes at the cost of other strategicgrowth plans, namely client-building activities.

|

For example, employees are not added to manage the increase innew business activity, or a client retention program may beforgotten in the rush to write new business or shed unprofitablelines or risks.

|

Anybody in the business will tell you they are getting theirquotes closer and closer to the date of renewal or expiration. Andif you have been in any underwriters office lately you will notethat the Greek architecture resembling columns is notintentionalthese are stacks of submissions that have yet to beseen.

|

So what does this mean for the traditional carriers versus theART market in the next few years?

|

Because of the ever-increasing numbers of insurance andreinsurance firms having to allocate capital to reserves to covermounting losses, they may lose sight of what got them in businessin the first placetheir clients' loyalty.

|

Clients who for years have been with one or two carriers becauseof good communication, trust and mutual benefit are now lost to theART market. Without insurance companies willing to maintain thosevaluable relationships by allocating capital torelationship-building practices, clients will go to those marketsthat can best manage their needs and encourage a partnership.

|

This means that the traditional market, which depends on largenumbers of policyholders to spread the risk among good and poorrisks, may be resolved to retaining a disproportionate number ofpoor risks that cant afford to go to the ART market, or at the veryleast, a smaller number of clients from which to spread risk.

|

This means that the higher premiums needed to sustain a companysprofitability will be allocated to fewer and fewer policyholders.At the same time, the properly managed and astute ART client isfunding anticipated losses and moving away from ever having to goback to being treated poorly by the insurance markets.

|

Not understanding this could leave certain carriers exposed to alarger adverse risk poolbecause the only available customers leftwill be those who will pay the higher premiums but lack the riskmanagement discipline to control risk.

|

The result of not being able to spread individual risk to largenumbers of similar risks will result in a further consolidation ofthe traditional insurance markets.

|

If this is the case, it could mean yet another period ofinstability and inconsistency within the ranks of the insuranceworld via consolidations, bankruptcies or withdrawal of certainlines of business.

|

Given this scenario, where would you rather place your riskinthe traditional market or, given a choice, the ART market where youcan at least try to control your insurance programs potential?

|

Christopher L. Kramer is vice president, professionalliability, alternative risk management for Neace Lukens inBeachwood, Ohio.


Reproduced from National Underwriter Edition, February 3, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.