Even though buyers of specialty insurance products stand to benefit from lower-priced insurance in a softening property-casualty insurance market, history reveals carrier customer service trends can be detrimental to their interests.

The latest projections by industry professionals indicate that U.S. commercial property-casualty market premiums will continue to shrink or remain stagnant, pressuring prices through 2008.

While the U.S. economy in 2007 and early 2008 struggled, the insurance industry's performance has not deteriorated as quickly as other financial sectors. Buyers, of course, are the clear short-term winners in the current market of slowing premium growth.

It is notable, however, that premium growth estimates for 2008 actually represent a leveling out of growth. Insurer margins remain healthy and, barring a major catastrophe, 2008 should prove to be a profitable year.

Insureds who buy solely on price must be wary of the packages of services they are receiving from carriers. The cheapest policy is rarely the one best suited for the risk. In a market where analysts project healthy underwriting profits but near-zero percent growth, insureds should consider the following issues in the year ahead:

o Deterioration of Customer Service:

In a softening market cycle, customers may experience deterioration in customer claims service processes.

North American insurance carriers have not invested in cutting-edge claim systems and technology innovations which improve customer service. Even though chief claims officers are aware of these technological enhancement options, and most will implement these systems into their claim departments at some point in the future, budget pressures in softening markets deter investment in the latest claims systems and customer service enhancements.

As a result, insureds should expect that carriers' claim departments and related services may diminish in depth and breadth.

o Carriers focus on claims and associated expenses:

While carrier attention moves from customer service enhancement, a renewed focus on payments on claims will emerge as a cost-cutting tool. File handlers' issuance of reservation of rights letters and denials of coverage may become more frequent.

Insureds should be focused on the grounds for these denials of coverage. It is essential that insureds work closely with their broker to fully understand their coverages and packages of services.

o Delays in payment process scrutinized:

On average, 80 cents of every dollar paid by an insurance carrier is spent by the claims department.

During a period of reduced growth, carriers are pressured by market forces to decrease costs in order to maintain profits.

With claims representing 80 percent of all cash outflows, payments to insureds are scrutinized at the highest levels.

o Carriers take aggressive approaches to litigation management:

In the late 1990s, a trend toward the development of litigation management programs emerged within carriers. During a softening market, claim departments strictly operate under these guidelines.

Included within such programs are electronic bill review programs, automated litigation management systems, uniform task-based billing and litigation quality audits.

Such programs benefit carriers by reducing expenses while benefiting insureds by keeping defense costs within policy limits.

However, insureds should be prepared for a possible change in their outside defense counsel of choice if the firm is unwilling to comply with strict implementation of carrier billing mandates.

o Increase in pre-trial settlements:

In a softening market, insurance carriers may be more concerned with the threat of a large loss due to an adverse trial verdict. The insurance cycle does not operate in a vacuum, and economic pressures have been known to influence the value of verdicts and settlements.

Knowing that the carrier is interested in a quick settlement to avoid a larger negative result, insureds should be prepared to consider innovative or nontraditional settlement opportunities.

o Increased focus on state law governing disputes:

Regrettably, carriers may resort to writing newer and riskier products to maintain market share or generate profits in softening market cycles. In order to protect themselves in future litigation, carriers will become more aware of the laws and cases impacting the risks associated with the particular line of business they are writing.

Insureds should realize that in a softer market, carriers focus more closely on which state laws they choose to govern disputes. This focus can create multiple regulatory issues for the insured.

o Unwillingness to provide "risk intelligence" to insureds:

As a value-added service, carriers often provide "risk intelligence" to insureds regarding their losses and how these losses relate to industry trends. Risk intelligence provides an analysis of loss trends as opposed to simple raw data.

Risk intelligence segments raw data by location of loss, type of business, whether it was caused by adverse jury verdicts or settlements, and various other qualitative and quantitative factors. Risk intelligence can also include details concerning average claim values and projected future losses given current trends.

However, during a softening market cycle, insureds should not assume that this data will be readily offered as part of the carriers' value proposition.

This is a cost to carriers and is usually immediately scrutinized during a period of declining rates.

While insureds can be the short-term beneficiaries of softening rates, they must be aware of the economic realities facing carriers. In taking advantage of lower prices, insureds must increase focus on obtaining quality products and services from a more wary marketplace.

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Prices Dropping, But Other Trends Seen As Less Encouraging For Specialty Buyers

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