The panel included a multinational broker, an influential independent agent, a top rating agency analyst, a leading industry economist, a Fortune 500 risk manager and representatives from Zurich.

The individual players are profiled throughout this eight-page special report, and highlights of our roundtable discussion follow:

Sam Friedman, Editor, National Underwriter:

IS THE MARKET SOFTENING?

Bigger buyers we surveyed, on average, reported seeing premiums flat or in decline, and they expect more of the same in their next renewal. Does that reflect your experience?

Richard Sarnie, risk manager at Engelhard Corp.:

We did see slight declines–maybe up to 10 percent of premium year-over-year–and that came after a hard market, if you want to call it that….We had taken substantial increases in retention to soften the blow of the hard market, and now we're very happy where we're at.

We're not even entertaining offers from our insurance partners to keep the same level of premiums coming in for lower retentions. We say, “No, we'll take the money, thank you.” Maybe we'll negotiate on terms and conditions, but we will take the premium reductions.

Sam Friedman:

The survey also found that while most risk managers are enjoying a buyer's market, a far higher percentage of smaller insureds are seeing premiums rise, sometimes by double-digits. Why the discrepancy?

John Ormerod, marketing director, Zurich Global Corporate in North America:

Some make the broad statement that this is a softening market, but it isn't true across all lines. Rates are still going up for many lines of business, but the level of rate increases is smaller. The rate ultimately depends on the risk profile of the individual insured company.

Richard Sarnie:

I think your smaller buyers probably didn't have the luxury of raising retentions to the levels that Engelhard is currently at or any company about our size could take, should take or would take. That affects their ability to keep their rate increases in check.

One of the things that the hard market did for us is that I was screaming right along that Engelhard needed a captive. We formed a captive [in Vermont] right after 9/11….It's just another avenue for us to consider. We're looking at ways to maximize its benefits and adding in other risks that maybe in the past we would have purchased insurance to cover, and now we're not.

Our insuring partners aren't going to like this, but we may decide we don't need to be sending our money to a third party–we'll just keep it to ourselves.

Paul G. Smith, broker at Willis:

I would agree with the survey's findings and I would agree with Rich [Sarnie] that the larger buyer had more options available to them. The hard market also put a new emphasis on risk control and claims management.

John Ormerod:

In the last hard cycle in the mid-1980s, we saw lots of businesses move to self-insurance in one form or another–whether it was deductibles, captives or whatever.

Guess what? We have seen the same thing in this hard market. It's one way the larger buyer can protect his company from the pricing fluctuations of the market.

I think those same alternatives are not available for commercial customers in the middle-market and small businesses.

Richard Sarnie:

I've never been a buyer of insurance–I've always managed risk–but a lot of my colleagues, when they were thrust into the hard market, forgot what it was like to negotiate, and I think the same thing happened with the brokers.

After that experience, if the large commercial insurers want the premium dollars to keep coming in, they're going to have to reduce their price or buyers will move off to another insurer or another alternative market.

William Stiglitz, IIABA president-elect, independent agent at HGH Insurance Group:

We operate much smaller accounts–probably the largest in our whole office is $250,000–and really and truly our customers are looking to transfer risk.

Manually-rated business is not seeing this softening that we're seeing at the upper levels, and I think that's very true because we're so automated now that at the middle-market level, and even for small business, the credits aren't available like they used to be.

They're pretty much slotted in–this is the rate–although there are still some options available at that level. We're encouraging a lot of our smaller businesses to look at higher deductibles, for example.

However, I have seen heavy bidding on two really decent accounts with good loss ratios–one on a renewal and one piece of new business. I was literally on the phone between the underwriter and the insured cutting my price and cutting my price and cutting my price–so that is happening on the good accounts, but you are having underwriters take a good, hard look.

We're also seeing an attitude from most of our carriers on existing accounts that we are not going to lose this piece of business. We will do what it takes to retain it.

The problem is trying to determine where that middle ground is to make sure your client is being served well and your company is happy, and that's a difficult game to play right now.

Paul G. Smith:

I would agree that carriers do not want to lose their renewals, and they're basically doing what they need to do to maintain their position on an account.

Very little business is really moving from one carrier to another over price–it's coming to new carriers as a result of terms and conditions and other factors. It's really not price that's driving it from one insurer to another.

John Ormerod:

There is an awful lot of uncertainty in the market as a result of pricing changes and the activities of the various attorneys general. In periods of uncertainty, people like to stay where they are.

There's some testing of the market, but we have very high renewal retention rates and it's really tough to get new business. People are just waiting until these storm clouds move over.

William Stiglitz:

It's tough to write new business. People for the most part are very happy with where they are, and they're going to give their agent the last look.

The market is turning softer, but it's not going to turn that way for everybody. It's got to be a good account, good loss ratio, good management, good financials. On any account of decent size, carriers are asking for financials–and they want something more than a [profit and loss statement] a guy drew up on a napkin.

Ray Thomas, president and CEO, Zurich North America Small Business:

Technology has really changed margins relative to the small-business customer. Agents in particular, as opposed to brokers, operate generally in a service center environment and really look for that capability because of the costs involved.

…It is indeed a tale of two markets because [risk managers] really want incredible attention from [brokers and carriers] relative to securing their business, whereas a florist doesn't want to see their independent agent or underwriter–the small-business owner is saying, “All I want to know is I have sleep insurance so I can rest easy that my business is covered.”…

The small-business customer of the future is from the Net generation. They love operating through the Internet. They want very little of their time spent on visits from their agents. They really want you to be able to service them on an electronic basis and they want to do it with speed. It's a new dynamic in this business.

William Stiglitz:

Just in the past year I have been able to write probably three or four small accounts strictly through e-mail. I have not seen the client. I may do a drive-by to take a picture if I have to. Other than that, they do not want to see you.

Richard Sarnie:

We don't shop everything all the time–even during the soft market–which is why when the hard market hit, Engelhard really did not see the increases that we were reading about.

I'm hoping the market does not get back into cash-flow underwriting. That doesn't do any of us any good….It doesn't make me happy when I have a gazillion markets knocking on my door saying, “I can cut 10 percent. I can cut 20 percent, 30 percent…”

We want to do business with large, financially secure insurers who are going to be there in the good times and the bad. No insurer has ever lost his account at Engelhard because of price.

We don't market our account every year. We may test the market just to gauge the price, but I want to be underwritten for me and my risk, not what my neighbor's doing or what the market's doing.

Sam Friedman:

IS THIS A RATIONAL MARKET?

Our survey found that even a substantial minority of big buyers in every line reported some price hikes, so have we entered a 'rational market' in which loss history still carries a lot of weight and sound risk management makes a big difference?

Steve Dreyer, managing director, Standard & Poor's:

I wouldn't use the word “rational” here. Look at the brokerage business for a second, with the compensation structure turned upside down by the Spitzer probes. The upheaval in that whole business model has got to have some fallout. It seems to me that the negotiating positions on all sides are now completely askew…

On the other hand, the information insurers are getting is better. It's enabling them to slice and dice a lot better. That's a good thing. Most conversations that we have with insurers about their ratings these days are about pricing, and that wasn't true even two years ago. It was more about capital or earnings or some other more traditional financial issue.

Now, it's all about pricing and how do you, Mr. Insurance Company, get comfortable that you're charging the right price because historically you've blown it. In the future you may blow it as well, but can we be confident that you have controls in place to avoid repeating the mistakes of the past?

Michael Murray, assistant vice president, financial analysis at ISO:

“Even though the Fed has raised rates eight times since last June, interest rates are still pretty close to 40-year lows, and while the stock market rose substantially in 2004, it was actually down at the end of the first quarter and it's lost ground ever since.

So I don't think there's really any danger of an outbreak of cash-flow underwriting that drives insurance prices lower, as carriers compete for premium dollars to invest because the investment earnings just aren't there to be had.

However, if the stock market comes back very powerfully and/or interest rates skyrocket, the soft market could get very soft much more quickly than anybody anticipates.

Sam Friedman:

WHERE ARE WE HEADING?

What is your assessment of the current market and its direction?

Michael Murray:

There's been a lot of talk about the market becoming more rational, but it seems to me that we've heard all the talk before.

In reality, as the market transitions from a soft market to a hard market and back to a soft market, there are inflection points–brief interludes where everything appears to be in balance and fair and rational.

Too much of the discussion about what's driving this pricing cycle has been focused on insurer profitability, and recent profitability does seem to fit with the idea that prices may be headed downward somewhat.

But profitability doesn't really explain what sparked the hard market we're coming out of. When we look back at the data and lay it out quarter by quarter, the strongest relationship we found is between surplus and pricing–between capacity and pricing.

…More than anything else, this cycle seems more capacity-driven, and that makes things interesting because at year-end 2004, surplus was at $393.7 billion or so, and that's a record–not just in nominal terms, but also after adjusting for inflation.

With all that surplus out there and the possibility that some insurers are thinking, “If I had more business coming in to feed my machine, I could spread my costs better and I could get my rate of return up,” prices could head south even though the industry's GAAP rate of return last year was just 9.4 percent.

Sam Friedman:

So, you're suggesting that rational or not, competition will still drive prices down?

Michael Murray:

Competition on the part of individual market participants is usually rational. The problem is what economists call “a fallacy of competition”–a situation where individual actors each doing what is in their own best interests results in harm to them all. When an individual player in the market sees an opportunity to profit by coming down just a little bit on price to attract more business, they have an incentive to do exactly that.

The problem is every individual player in the market faces that same choice, and that's what gives rise to soft markets that get soft to the point where the pain becomes unbearable.

At that point, individual players begin to stand back a little. When enough do, prices start to rise from their cyclical lows and, eventually, the whole process repeats–that's what makes it a cycle.

Sam Friedman:

But you're not optimistic we're going to see stable pricing going forward under current market conditions?

Michael Murray:

We've already had some talk about how difficult it is to get new business, right? That means people are out there prospecting for new business and they're not able to find it. The implication is that the market has not actually become permanently rational.

Maybe it's like a broken clock–it's right twice a day, and we're in one of those little interludes, and we're in for more of the same kind of cyclical behavior we've seen in the past.

I subscribe to this view because I haven't yet had somebody explain to me what's fundamentally different about human nature and human behavior….It's still people who decide how to price insurance. Even when underwriting and pricing decisions are automated, people set the parameters.

Mark St. Aoro, senior vice president and chief compliance officer, Zurich North America, specialties markets:

Zurich is really driven by rational factors in our underwriting. We have separate rating tools for many of our specialty lines of business, including EPLI, fiduciary, health care and some E&O.

For D&O, our Management Solutions Group uses an underwriting methodology based on numerous data points, including a company's market capitalization.

We assess a company's critical components, such as expected claims frequency, expected settlement values and stock price volatility trends. We also show an insured how they compare with peer companies. This brings greater transparency to the process.

Sam Friedman:

So, your rate-setting is not market-driven?

Mark St. Aoro:

For all the lines my group writes–excess casualty, D&O, employment practices liability, etc.–we determine the technically correct price for an individual account and that's what we base our pricing decisions on.

It's not market-driven pricing, but what we believe are the actual costs of doing business.

We do individual account underwriting to determine the correct price–not what the market says the price should be. That's really embedded into our underwriting workstations as well as our corporate reporting.

Richard Sarnie:

That's why Zurich writes my primary D&O, frankly. I sat down with their people, who explained how they priced it.

They underwrote Engelhard not on what the market is, and that's what I look for in an insurance partner–somebody who is going to understand my risk almost as well as I do.

Gerald K. Chiddick, vice president, Commercial Business Group, Zurich North America:

We look at the individual risk elements and exposures, and then determine what coverage is most applicable at a technically correct price.

We're focused on profitably writing risks, and we're really keying in on developing much more rigor around our underwriting process.

Sam Friedman:

THE AGENT'S VIEW:

From an independent agent's perspective, are you able to market individual risks to your carriers and bargain over price and terms, or are you stuck with whatever rate the manual says to charge?

William Stiglitz:

Everything is so slotted now at certain levels. We're told by our companies at this level you have to go to the machine. You may be able to send an e-mail to an underwriter, but we have no clue who the underwriter is. They're great people and they respond quickly and they do a great job, but on the other hand, very seldom do I ever pick up a phone…

We do get the loss runs and things like that, but at a certain level and below we're just not doing that. It's just not available.

Now, you do have some options in there as to credits you can give at some point, but again that's the thing that's usually accomplished by e-mail. In most cases it's pretty well slotted.

The independent agent is pretty well told what they can and cannot do. What's available for heavy bargaining and so forth? That's becoming more compartmentalized.

Sam Friedman:

How does that scenario play out with the bigger brokers and buyers?

Paul Smith:

It's almost the opposite with the larger accounts. Over the last three years there's been a real discipline brought back to the underwriting process–a peeling back of the onion of sorts, looking at what the actual exposures are and what the loss history is.

There are some things out there we really need to look at besides pricing that are underwritten very specifically to an account.

What type of risk management department do you have? What's your safety process? What's your claims process, risk control? How quickly are your workers' comp claims sent in?

Things like that make a big difference in the underwriting process.

Sam Friedman:

IS COVERAGE EXPANDING?

A softening market doesn't just revolve around price. What about the coverage being offered today? Are limits rising, retentions dropping and terms expanding?

Paul Smith:

We've talked an awful lot about pricing, but terms and conditions are absolutely on the table for large accounts, driving pricing either up or down depending on what your needs are.

There's no such thing any longer as renewal at expiring terms. Many of the large insurers are changing their policy forms, requiring a comparison of policy forms that previously might not have been necessary. There are major differences in the terms and conditions, and it's our job to determine what they are and explain them to the ultimate buyer.

Sam Friedman:

What impact does that have on the renewal timetable?

Paul Smith:

The underwriting process does take more time and effort these days on behalf of the risk manager because they have to gather more data, more loss information…but I think it creates a better understanding of the account.

Underwriters also want to get together with their risk managers more frequently. They feel they can do a better job when they can look someone in the eye, establish a relationship, get to know them and really get to know the firm a lot better than they have in the past.

Sam Friedman:

THE BUYER'S VIEW:

Is the feeling mutual? Do risk managers want to sit down with their underwriters or just let their brokers handle the negotiations?

Richard Sarnie:

I want to meet the senior management of my insurance partners so that they know who they're dealing with and so that if there is an issue, I'm going to pick up the phone and I'm calling the president of the company.

The broker is my outsourced risk management group. My whole risk management staff is myself and my assistant risk manager for a global Fortune 500 company, so I rely very heavily on my broker to put together submissions, line up the meetings and make sure we don't just meet with some junior underwriter.

However, while my broker facilitates the deal, he does not make the deal happen. My broker does not pick the markets and does not negotiate on my behalf.

It's the broker's job to make sure the transaction takes place. I look at all the quotes and make the deal happen and move on.

Paul Smith:

I would say the longer-term oriented risk managers think like Rich [Sarnie]–the ones who want to look at something over longer than a one-year period, who know where they want to be in two or even 10 years–they absolutely want to establish that type of a relationship. They want to meet with their underwriters in order to be assured they're going to be around to pay claims down the road….

Then again there are others who are short-term oriented. They say, “Hey, look! I've got a 10 percent decrease! Isn't that great? What about next year? Let's cross that bridge when we get to next year.” So, buyers fall into various categories.

Sam Friedman:

THE SPITZER FACTOR:

I'd like to shift gears to the impact of the probes by New York Attorney General Eliot Spitzer and other law enforcement agencies. How have the scandals over alleged bid-rigging, contingency fee abuse and misuse of finite reinsurance to boost balance sheets affected the market?

Richard Sarnie:

I want to make sure we're clear on what subject we're talking about, because there are two separate issues. One is contingent commissions, and then there's the bid-rigging and the criminal aspect of the Spitzer probe.

My frustration with my colleagues in the risk management area is they seem to have melded the two together as if brokers who took commissions are all crooks. Time out! We all knew there was back-end money going out the door for volume. We knew it and never had a big issue with it. It's just like any other large manufacturer.

We negotiate volume discounts all the time–it's part of the business. But bid-rigging is another story.

Sam Friedman:

Is there any difference in broker-buyer relations now that the big brokers are no longer accepting contingency fees?

Richard Sarnie:

With the contingent commissions going away, obviously that's huge….My fees aren't going up–I've already made that quite clear. I understand you've given up X amount of millions of dollars, but that's your issue, not mine.

I think it's going to make brokers leaner and meaner and better….I think risk managers are going to look at some of the smaller brokers, and hey, maybe it'll force my colleagues to get out and meet their markets and understand a little bit more about the transactions.

What is it going to do to us? Nothing. It's still business as usual for us. We're not shopping our broking business. We weren't impacted by the bid-rigging, but hey, if we're going to get some money back, great! To me, we're looking at it as found money.

Paul Smith:

From a Willis perspective, [abandoning contingency fees] is fabulous news because we think it's going to create a much more level playing field. So at the end of the day, if the big three brokerages have given up [contingency fees], that means we need to be upfront, sit down with prospects and clients, and say here is what we need to service their account.

Within the Fortune 500 or 1000 risk management community, we're shifting to more of a fee-for-service, as opposed to a commission-oriented environment. It's more a la carte. If you need this much risk control, claims, whatever the case might be, we can price the services much more accurately.

Sam Friedman:

AGENTS DEFEND FEES:

Willis–the first to voluntarily give up contingency fees–has called for a ban on such compensation altogether. What do independent agents make of that suggestion?

William Stiglitz, president-elect, IIABA:

In October 2004, the Independent Insurance Agents & Brokers of America passed a resolution calling for disclosure on the part of brokers as to their financial arrangements. But the fact is that in NU's survey, 91 percent of clients said they have not requested information regarding their broker's compensation rate.

I have not had one client ask about it, and I have been around this country and asked the same question, and out of most large groups I may get one hand raised about their clients asking how their agent is compensated.

Sam Friedman:

So, you stand behind contingency fees?

William Stiglitz:

We feel there is value in some fee-based arrangements, but for the most part–for the business independent agents deal with–we are paid a fair commission. We don't think it's an outrageous commission by any means.

Our profit-sharing agreements with our companies have been developed over a long period to reward excellence and placing business, and we think our clients also are rewarded by that. The companies that we place business with are able to provide certain services and they are looking for good business. They are rewarding all of us.

This is the sales culture of America, and to attack it based upon what happened in the case of a few bad brokers is absurd, so I think we should continue on as we are.

I do think we will see some fee-based business creep into the agency system, but only on large accounts. For the most part, we will defend our way of compensation until the very end. We feel it is fair. Customers have been treated right.

Richard Sarnie:

I have no issue with contingency fees–as far as whether brokers give it up or not. We chose to go on a fee basis with our broker partners. Every year we negotiate the fee based on what services I need, and I want my broker partner to make a fair profit on me, just like we want to make a fair profit. We're a for-profit company, just like our insurance partners are.

However, locks keep honest people honest. Hopefully, risk managers who were giving their broker the keys to their car and saying, “Hey, drive it and let me know when you get back with it”–maybe they'll realize they need to be driving the car.

Steve Dreyer:

The whole bid-rigging scandal has tarnished the integrity of the industry, period. It's unfortunate, but that is what has happened. The payment of contingent commissions in general–whether that system was right or wrong, for the big brokers at least, it's history now….

The broker companies will all survive, and they will be leaner and meaner. How they deal with the challenge is really what we're focused on right now.

Sam Friedman:

What about the impact on insurer-buyer relations?

Steve Dreyer:

From the insurer's side of the equation, you have to bring in all of the other investigations now–the questions about finite reinsurance deals and allegations about cooking the books and all of that….No matter where this all ends up, the scandals are impugning the believability of insurer financial statements.

Why is that so important? You're buying a balance sheet when you buy an insurance policy. So we have the commercial p-c industry rating outlook at negative right now despite the sector's very strong earnings.

Why are we still negative? It's because we haven't seen the end of this, and the probes go well beyond [Eliot] Spitzer. He was the catalyst, but there are many others involved now–the SEC, insurance commissioners, perhaps even the FBI.

Sam Friedman:

TERRORISM RISK LOOMS:

Let's focus on one major, looming exposure–terrorism. What does the standalone market look like, and what will happen if the Terrorism Risk Insurance Act is not renewed by year's end?

Ray Thomas, Zurich:

I can tell you that if nothing happens [in Washington], the rating agencies will be sitting with that negative outlook for us for the next 20 years.

There is no way we can be protected with that kind of unknown in front of us without some type of federal help or backstop.

Michael Murray, ISO:

I think there has been some progress toward development of a private market solution for terrorism insurance, but I don't think anybody believes there's enough private capacity to really deal with the problem in the absence of a federal backstop.

If you take that as the premise, probably the best way to guess what's going to happen if TRIA lapses is to look at experience in the wake of 9/11 before TRIA.

After 9/11, everybody's perception of risk changed overnight. Before TRIA was enacted, insurers started to grapple with the question of whether we can cover this risk. In some situations, state law mandates that you cover it, but in other situations terrorism can be excluded, and I think that's largely what happened after 9/11 and before TRIA.

That might conceivably happen again if there is no extension of TRIA, and some policies written already have contingent language that would exclude terrorism in the event that TRIA is not renewed.

Ray Thomas:

Wouldn't it be interesting to go back to the 9/11 event and pretend there was no coverage for terrorism?

In other words, when you have a specific exclusion for terrorism, what would have happened to the U.S. economy relative to that $30 billion in insured losses on 9/11? So I do think Washington should seriously consider the consequences of pulling the rug out from under the industry.

Richard Sarnie:

You are assuming insurance is the only solution to covering terrorism risks. I agree TRIA should be renewed, but I don't buy [terrorism coverage] in the free market. I insure it to my captive and rely on TRIA to back me up.

So if TRIA goes, obviously we're not going to be able to handle this the same way, but my point is that the answer is not “insurance at any cost.”

We're going to look at it and see what we can dedicate these dollars to–better security, better this, better that. We're going to control our own destiny and not worry about whether the free market is going to provide us with insurance.

William Stiglitz:

There's no free market stepping forward and saying we'll write this risk, so the federal government is going to have to step up and do this. Otherwise, terrorism is just going to be excluded when it can be.

Sam Friedman:

IN CONCLUSION:

I want to thank all of our panelists for speaking so frankly and insightfully about the state of the market. National Underwriter will publish the results of the Fall 2005 survey, looking ahead to the critical Jan. 1 renewal season, in our Nov. 21 edition.

Roundtable participants included (top, l-r): John Ormerod, Zurich; Bill Stiglitz, IIABA; Sam Friedman, NU; Paul Smith, Willis; Richard Sarnie, Engelhard; Mark St. Aoro, Zurich; and Maynard Robison, The Response Center. (Bottom, l-r): Raymond Thomas, Zurich; Steve Dreyer, S&P; Michael Murray, ISO; and Gerald Chiddick, Zurich.

In a lively discussion lasting over two hours, a panel including a broker, independent agent, rating agency analyst, industry economist, Fortune 500 risk manager and representatives from Zurich in North America tackled pricing and coverage trends, as well as hot-button issues such as terrorism and the impact of recent regulatory probes.