Buyers Brace For Long Haul Conditions in thereinsurance market may have a trickle-down effect to commercialinsurance buyers. But when National Underwriter contacteda group of buyer representatives about conditions in thereinsurance market and their implications recently, the activitiesof front-line insurance companies were also top of mind for theseexecutives.

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Michael R. Mead, president of M.R. Mead & Company LLC, aconsulting intermediary in Chicago, said that finding coverage isstill possible for insurance buyers. “But it's like a game ofmusical chairs in which about half of the chairs are gone,” hesaid. “There are some classes of business, such as doctors andhospitals, where it is almost impossible to get coverage.”

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Organizations forming captives can stillobtain reinsurance in London. “You may have to accept terms youdon't like,” he noted, however. Dismissing that problem quickly,“the problem is fronting,” he went on to say. “For many peoplethere is none,” he said, suggesting that this was more immediateand pressing issue for insurance buyers looking to get past hardmarket availability and insurance pricing problems withself-insurance and captive solutions.

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Because of the shortage of frontsinsurers who issue a policy onbehalf of a captive or self-insurerdoctors and other medical groupsare looking at risk retention groups, which do not requirefronting, he said. (See related article, page 24.) “It's a huge andexpensive commitment, but it is the only alternative for some ofthese people.”

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Even though some coverage is tight, Mr. Mead stressed that RRGsand captives are not for everyone. “So a lot of people will bepaying higher prices for traditional insurance, if they can get it.And some people are going to be storming the state capitolsdemanding help.”

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He explained that regulators need to be creative and think ofdifferent approaches. “For instance, if you have a captive inArizona, you can write your Arizona [workers'] comp. You can't dothat in every domicile.” (Workers' comp can also be written bycaptives in Georgia and Hawaii, but not in other states.)

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There are “still pockets where there are no problems” withcoverage, he said, such as small manufacturing companies and smallcharitable foundations.” But, according to Mr. Mead, “anything thathas to do with professional liability or workers' compensation is ahuge problem.”

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Where fronting is available, Kevin Doherty, president of theGeorgia Captive association and a partner with Gladstone, Doherty& Associates in Nashville, Tenn., said most of his clients withcaptives are seeing 15 percent to 25 percent price increases fromtheir reinsurers.

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“Theyre usually not able to get reinsurance at the sameattachment points and the same limits, especially in workers comp,”he said.

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Many of his clients, he continued, are having to agree to capson coverage because reinsurers “are not offering the fullstatuatory coverage that used to be the norm.”

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Mr. Doherty continued that limits are going up and retentionsare going up “dramatically.” For example, he said, a lot of hisclients that had specific retentions of $250,000 have seen themraised to $500,000 or more, “which makes a big difference in yourprofitability,” he said.

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Increased retentions means those organizations “must now coverthe first half-million, instead of the first quarter-million foreach individual occurrence,” he explained. The reinsurer doesntstep in until the claim reaches $500,000, “and very few claims getto that. However, a lot more claims get to the $250,000 level,” hesaid.

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Clients are also being affected “at the top end,” he said. Forexample, workers comp is what they call statutory coverage, meaningthat if a worker is injured on the job the employer is responsiblefor compensating the worker “indefinitely, theres no policy limit.”Reinsurers, however, are “putting a $20 million limit, or a $10million limit on your entire workers comp portfolio,” which headded, “probably wont matter that much, but its really a questionof if you can sleep at night.”

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Even though it would be rare for those limits to be utilized, headded, “the reinsurers are not taking any chances.”

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On top of this, he said, premium levels have gone up, “so yourepaying more and getting less.”

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The argument could be made, he said, that reinsurance wasunderpriced for several years and that a correction was due. “To anextent I think thats true,” he said, but “the biggest problem isthe stock market. Its not 9-11. That was a problem, but I think itsthe stock market. Because if reinsurers cant earn from the stockmarket they have no choice.”

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Mr. Doherty explained that while U.S. insurers are regulated andtheir investments restricted, some European reinsurers ultimatelydont have the same restrictions, “so they can invest large sums oftheir portfolio diversely.”

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Reinsurers that have been hit hardest in the stock market “arepassing on the cost, theres no doubt,” he said. “But they were alsopassing on the savings and the benefits. Its a competitive market,so there are a lot of different ways to look at it.”

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Lance Ewing, first vice president of the Risk and InsuranceManagement Society in New York, said, “This hard market is nothinglike weve seen.” Mr. Ewing, executive director, risk management,for Park Place Entertainment in Las Vegas, Nev., said the markethas seen adverse effects from both reinsurance and primarystandpoints.

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Though there are problems in the reinsurance market, he agreedthat, “You cant lay everything at the feet of the Europeans. Theywere allowed to invest in equities and stocks that unfortunatelydidnt pan out. Anyone who is checking their 401(k) plans lately isseeing the same thing.”

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Other factors in the mix adding to the unpredictability includeimpending wars, economics, layoffs, and directors and officersissues, he said.

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“All the issues facing the risk management community are facingthe carrier as well,” he said. “Ten or 15 years ago, no one wouldhave thought Reliance would have gone out of business. No one wouldhave thought Kemper would have the problems they currentlyhave.”

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(Kemper Insurance Companies, downgraded by several ratingsagencies in recent weeks, sold off its group captives business toThe Hartford, Old Reliance and Zurich North AmericaEnvironmental.)

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Mr. Ewing believes there was more stability during prior hardmarkets.

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“Youll see more activity in the captive market, risk retentionpooling, alternative risk financing programs, and [higher]deductibles or self-insured retentions,” he said, forecasting buyerreactions to high insurance rates and the lack of stability.

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Insurance buyers are preparing their chief financial officersfor the worst, asserting that many risk managers are going back totheir CFOs and suggesting that the only options available to themare to raise deductibles or self-insured retentions.

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(A self-insured retention differs from a deductible in that,with an SIR, the insured undertakes functions that normally wouldbe performed by the insurer for losses within the SIR.)

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Another way of dealing with the situation, he said, is to stepup loss control and safety. However, “a lot of times, risk managersare faced with the fact that in these economic times, a lot of whatgets cut is safety and loss prevention. Thats a battle that we haveto face,” he said.


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.


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