A growing uncertainty pervading nearly every industry and company, no matter its size–not only in the United States but worldwide–has set the stage for a volatile commercial insurance market for buyers facing renewals this year and next, top risk managers and service experts report.

The outlook was summed up by Lance J. Ewing, vice president of risk management at Harrah's Entertainment Inc., headquartered in Las Vegas, Nev., who suggested it might be time for buyers to adopt a “foxhole mentality” in protecting their organizations.

“The current insurance market is in a state of confusion,” said Mr. Ewing, former president of the Risk and Insurance Management Society. “We're in uncharted territory now from a risk perspective. The usual ebbs and flows will not apply to the renewal market in 2009 and possibly into 2010.”

As a result, insurance rates will be determined on “a much more individual basis, and underwriters–at least the carriers I'm familiar with–have walked away from business that in the past 18-to-24 months they would have been happy to have,” he noted, adding that some carriers are “taking a pass at the plate and saying 'No thanks, no interest.'”

While he doesn't think risk managers are yet “digging the foxhole real deep,” he noted they are “certainly in more of a foxhole mentality than in the past–and we're not sure what the enemy has on the other side of the line right now.”

Part of the problem is that “[primary] carriers don't have the investment book they used to have to fall back on to cover certain losses, the reinsurers' investment portfolio doesn't look wonderful, and corporations don't have a lot of ability for expansion–nor the ability to sell certain assets to generate cash and liquidity right now.”

Risk managers with captive insurers, he explained, are not immune to financial market trends, because their returns on investments last year were also “less than stellar,” he noted.

As a result, risk managers are examining their deductibles and determining whether they can afford to take larger limits or self-insured retention levels. Coverage considerations are divided into the “'compulsory coverage,' the 'nice to have' coverage and the 'luxury items,'” he added.

Any “luxury” items, however, are “off the board right now in many corporations,” Mr. Ewing said, explaining that what is determined to be a superfluous coverage depends on the industry.

“If you have business travel accident insurance out there and you only travel three times a year, that might be a luxury,” he said. “Every corporation will have to look within its own silo.” And this situation, he added, is “where it goes back to enterprise risk, as you go back to your CEO or CFO [explaining] these are my lists of what [coverages] we have to have.”

The result is “a lot of soul searching and insurance searching within the risk management office,” Mr. Ewing said. “There is no quadrant that has not been affected.”

He added that it's impossible to have a conversation about insurance with a board of directors “without throwing in that three-letter word–AIG.” Boards as well as chief executive officers and chief financial officers are asking “how much [of our coverage] is with [AIG], and also broadening the horizon to ask about financial strengths of other carriers–how viable are they in the marketplace, and are they going to be around.”

All in all, “risk managers truly are earning every dollar they're making this year,” he concluded.

An added consideration for buyers–hardening rates–recently was suggested by the latest results of the “Benchmark Survey” run via RIMS and Advisen, both based in New York.

Released in February, the survey found that although insurance premiums for businesses continued a five-year trend of falling rates during the fourth quarter of 2008, a reversal of the trend may soon be underway.

Insurance premiums for property, general liability, and directors and officers coverage all decreased at a “materially slower pace than in recent quarters,” according to the survey of policy renewal prices reported by North American corporate risk managers.

Data from the survey corroborated Advisen's recent forecast that the commercial insurance premium market cycle is close to its bottom. Advisen analysts projected that commercial insurance prices should begin increasing by the fourth quarter of 2009 or the first quarter of 2010.

Sarah Perry–president of the Public Risk Management Association, as well as risk manager for the City of Columbia in Missouri–said she anticipates a harder market for her Oct. 1 renewals.

I do know that our property carrier has already said, “If you're a good client and are taking care of the recommendations we've made, you should only see about a 5 percent increase.” On the other hand, the carrier added, “If you're not such a good client, or have outstanding recommendations, it's going to be a lot more.”

Part of being a “good client” she added, is keeping down the number of claims.

Ms. Perry, who purchases all insurance coverage for the city, said she traditionally budgets for 10 percent increases overall, “just to be safe,” but this year will budget for 15 percent hikes.

She said public entities are limited in how they can raise money to cover higher premiums, and as an alternative are looking at which services can be cut and which need to be kept in place.

While public risk managers don't have some of the concerns as those in the private sector, “because we deal with the public, we're seeing an increase in claims made by the public and often claims that have no merit,” according to Ms. Perry.

She said many are making claims that people would not have considered filing previously, due to the worsening economy, especially with so many losing their jobs.

“There's almost a feeling of desperation with some people,” she said.

For example, she said more of those who are picked up by the police claim they have been mistreated or abused. Another example is people who had small, miscellaneous losses in evidence for a year or more and did not claim them within the 90-day time limit are now coming back for those items.

“I'm also seeing more emotion attached to claims,” she said, which makes communication about the claims “much more difficult.”

William T. Hold, president of the National Alliance for Insurance Education and Research–a national insurance and risk management education organization based in Austin, Texas–observed that what is happening in the financial markets “impacts everybody,” even those businesses not currently in trouble.

Organizations with stable revenues that are not in debt are still questioning their agreements with vendors (including insurers), whether they are using employees effectively and if they have too many workers. “It puts big pressure on everyone and casts a pall on everything,” he said. “I've never seen it [like this], where it permeates every business.”

In the past, for example, there have been real estate problems, which have migrated through different areas of the country but did not impact the entire nation at once. Now, however, “not only do we have a situation that involves the whole country, it involves all countries,” he noted.

Offering advice to buyers, Mr. Hold suggested “adopting a philosophy I call 'rational optimism,' that's somewhere between going around in sack cloth and ashes, and having the pigtails of Pollyanna.”

In other words, he added, “while you need some amount of optimism to run a business, you have to be rational about it. If you believe things are the worst they can be, you might as well fold up your tent and go away.”

He cautioned that even though the pundits and experts are freely giving their opinions about the state and direction of the struggling economy in general, and the insurance market in particular, “no one really knows what the right answers are and what really occurred.”

His biggest concern is Congress' recent action–in the wake of bonuses awarded by AIG's Financial Products unit–”of picking out a certain group of people and saying, 'we don't like you.'”

While there may be “a good reason not to like them,” choosing a particular group of people to tax at a different rate than everyone else “'because we don't like what you did'–that is really dangerous,” he added, referring to moves in Congress to retroactively impose a tax on the bulk of bonuses paid to those at firms receiving federal support funds.

An issue he sees coming out of the financial market meltdown will be the question of how to deal with inflation, as more and more money is printed to finance the stimulus package and overall federal budget deficit–with his biggest concern being the impact on property.

“Will people purchase higher limits of insurance because their property is worth more now? On the other hand, you're paying your premiums with money worth less than a year ago,” Mr. Hold said.

Overall, he agreed the woes roiling the financial markets most likely will mean a harder market for buyers sooner or later.

Charles Lee, a principal in Towers Perrin's Dallas office, observed that buyers are under pressure to keep budgets at or below that of previous years, which creates a “huge pressure on price.”

Most organizations, he said, are in survival mode and under pressure to keep budgets low. “That's difficult for an insurance buyer, who doesn't necessarily control the cost [of what] they're buying.” He added that some buyers are “pushing back on the dictates of senior management for cost containment, maintaining they have to buy quality.”

Many buyers also are dealing with significant self-insured retentions, which must be securitized by letters of credit “or other instruments,” he noted, observing that “those LOCs are becoming more expensive and harder to obtain. [Buyers] are being squeezed from all sides.”

As for carriers supplying coverage to buyers, “insurance markets are struggling to balance their need for premium income and capital preservation and generation,” he said. “They want to grow their capital and surplus if they can, but they're in a competitive environment, so if they get too focused on that they can potentially lose market share.”

While the insurance market still appears to be soft, at some point it will harden, Mr. Lee predicted. Part of that hardening will be a result of insurers with a solid financial base pricing to maintain strong ratings, while their shakier competitors may have difficulty following suit. “The stronger carriers may seek to exact a higher premium,” he said, which will add to buyers' difficulties.

While he doesn't see buyers dumping markets, such as AIG, “there's a challenge at each renewal of looking closely at the carriers on a given portfolio” and investigating their financial security, Mr. Lee said.

After all, he noted, “at the end of the day, risk managers also have to risk manage their job. They don't want the CEO walking in and saying, 'How did you let this happen? We're with a carrier that's gone bankrupt.' So they have to be careful.”

He added that “it's probably easier to explain to senior management that renewal costs went up, or they were not able to reach the targeted budget, but that they feel good about the carrier, because if they have a large loss it's more important that the carrier is actually going to pay.”

How long the economic crisis will last, he concluded, is up in the air. “I'm an eternal optimist, but this recession is not comfortable for anybody and it's very painful for many,” he said. “We probably were due for a correction, but this is more severe than anybody would have expected or wanted.”

Mr. Lee added that while “I don't know where the bottom is, I think at some point we'll look back and see that the recession started turning around in mid-2009.”

Howard Stecker, senior vice president with SMART Business Advisory and Consulting in New York, said that while the current climate is “not unlike what we've seen before, there are some very different dynamics, which is how fast the whole economy has fallen down and how broad [the decline has] become.”

This time last year, he recalled, it appeared that banks and mortgage lenders were having the problems. Now, however, it's “pick your retail store of the day that has announced it's going out of business.”

Overall, the country is at a 25-year high on unemployment and “all those things factor in,” Mr. Stecker said.

A by-product of downsizing is the issues layoffs raise from a risk management perspective, “creating ripe conditions for a more litigious environment,” he warned, adding that “direct writers also focus on getting every cent from the reinsurer, so it goes through the whole supply chain.”

“We really haven't seen a bottoming out. Things are coming out of the woodworks–there are so many Ponzi schemes,” which will lead to even more problems in getting coverage for lines such as directors and officers, he added.

Indeed, Mr. Stecker predicted that the line perhaps feeling the biggest impact of the financial crisis will be D&O, with prices rising and coverage tightening accordingly.

“Think about all the governance issues that have arisen,” he said. “AIG had $2.7 trillion of credit default swaps outstanding–leveraging almost three times their balance sheets. All these things ultimately dump themselves to insurers having to look at what they can afford and what they can cover, and for what risk premium.”

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