While it still may technically be a good commercial insurance market for risk managers, with flat rates predicted until at least late next year, top buyers and other experts warn there are caveats–such as extra time required to place accounts, new demands for transparency on both sides, and negotiations required over not just price, but terms and conditions as well.

“It is a buyer's market,” according to Steve Levene, practice leader for retail insurance brokerage business at Towers Perrin in Stamford, Conn. “The question is, are we at the bottom of the market, and how do we know?”

If this is, indeed, the bottom in terms of pricing–which appears to be stabilizing over the past few months–now would be a good time for buyers to look toward multiyear renewals, advised Mr. Levene.

“If your current carrier is not excited about keeping your account and doing multiple-year renewals, it might be time to look at other carriers or someone who might do a multiyear,” he said.

To have an advantage in a market where many insurers are reluctant to give more price reductions, other tactics should be employed, he suggested.

“In a market like this where people are at the bottom, it's how to create competition where none exists,” Mr. Levene said.

For example, he said, on large property insurance purchases, it can pay to create competition through structure options. “We start with P&L modeling the largest locations and modeling the aggregate locations to see what the maximum loss might be,” he explained.

The next step would be to build “separate structures with different carriers and different retentions, limits–maybe a multiyear option.” Then, he advised, go to each of the markets, “where some might say it's too cheap, or doesn't fit–almost finding a structure that every market can fit into.”

The object is to fit the carriers into different niches, especially in a large property program. The end product is “every carrier being able to participate in the program,” he said. “The more you can get to participate, the more the price potentially goes down.”

One drawback to preparing a program like this is time, he conceded. However, brokers that “don't have 20 renewals on their desk and have time to look at the individual options, market those against each other and go to the different carriers” can help lower costs on renewals, he said. “It's more of a process than to send out what you currently have and hope to get a lower price, and maybe try to get other markets to either participate or decline.”

This process begins with a comprehensive renewal strategy meeting, with the broker and risk manager going through the multiple options and agreeing on which carriers would be acceptable and which would fall close to the mark. “Then you go to the markets and get them to participate,” he said.

Some of the brokers, however, have so many renewals that it's difficult for them to go through this process. The risk manager will need to become involved and “let the broker know he needs this time on the renewal.” Otherwise, he cautioned, “you'll end up either flat or potentially with some kind of price increase.”

The reason is that underwriters are “at the bottom” in terms of pricing, he said. Risk mangers are used to 10 percent decreases [over the past few years], and the market is pushing away from that.”

Creating the multiple-option strategy at least gives underwriters “a reason to reduce the price, rather than the typical back-and-forth negotiation,” he said. “You don't see enough of that from brokers, mainly because they're busy.”

For risk managers accustomed to 10 percent decreases, who may be facing 5 percent hikes or flat renewals, he recommended starting early and having a comprehensive renewal strategy. “This is why creating competition within the market is a good idea,” Mr. Levene said.

Casualty renewals are even more interesting, he observed, because there are probably more barriers to switching carriers than in the property arena on coverages such as workers' comp and general liability.

He recommended that buyers begin to develop an “exit strategy” in their current program. “If you don't have one, then you need to develop one in the agreement you have with the carrier.”

Things to be considered, he said, include “how the collateral letters of credit reduce after you leave.” While there are standard agreements with insurers, he noted, “over the last few years, through negotiations, we've been building-in enhanced exit strategies–when and how the collateral will be reduced.”

Most risk managers are concerned that when they leave an insurer, “they are no longer a current client, and getting the collateral or letter of credit reduced as they normally would is going to be more difficult–and normally they're right about that.”

He added that while buyers often want to change carriers, they often don't “understand what they're leaving behind from a collateral standpoint. Usually the agreement says when you leave the collateral will not be adjusted at all for 24 months, and then will be adjusted at the insurer's pace.”

An advantage to building a “step-down” of collateral in the current program is that “when you do go to shop, if you have an exit strategy, most new carriers will allow you to 'step-up' the collateral with them, almost in conjunction with the 'step-down' of the previous carrier,” he explained.

Now is the best time to put such a strategy in place, thus enabling a buyer to shop during the next renewal season without concern. “You call it 'revising' the agreement, but to you it's an exit strategy,” he said. “All the carriers do it, but they won't advertise it. You have to ask.”

BUYERS' VIEW

W. Michael McDonald, vice president of risk management with Quality Distribution Inc., a trucking firm in Tampa, Fla., and also a director at the Risk and Insurance Management Society, said the majority of his renewals were in mid-September and mid-October.

“In terms of strategies, we did okay on our renewals,” he said. “We have large deductibles, so the majority of our costs are in claims, not insurance premiums.”

Renewals averaged about 6- or 7 percent reductions for the same terms and conditions across-the-board. “We only had an increase in one–[employment practices liability insurance]–and that was just a slight increase. We've had a few claims in that area,” he explained.

Mr. McDonald said the company has fewer employees today than two years ago. “We now have about 1,000 employees, so EPLI can come into play when you're making adjustments in head count.” He noted that the firm employs a large number of independent contractors, as well.

In terms of renewal strategies, “what I would recommend in the current economic environment is to make sure you properly assess the next 12-month exposure base,” he said. “Look at your industry and try and determine where your industry is going and where the economy is going, and be aggressive on the down side.”

In other words, he said, “don't over-report payroll, don't over-report miles driven, or revenues. Take a conservative view and be pessimistic about when things are going to turn around.” All in all, he added, “if you're wrong, you'll just end up paying an additional premium.”

One strategy is to go into renewals “with a story, and the story is that 'our exposure bases have been dramatically reduced as a result of the recession.'”

For example, he explained, “let's say your exposure base has dropped 12 percent–you should expect a corresponding 12 percent drop in the premium. So that gives you a base to operate from.”

He warned that not every underwriter will give a 12 percent drop on premium, as much depends on claims history.

Casualty exposures, he noted, are “probably a little easier–workers' comp, auto liability and general liability–because the exposure basis is employees, leading into payroll, sales and revenues, and miles travelled. Almost every company is going to have significant reductions in that area.”

He described the property side as “a little more difficult, because have your properties really reduced in value? If you're insuring for replacement costs, did your properties really go down? Hopefully that's a starting point to make a realistic assessment of where your exposures are going over the next 12 months.”

While this is a starting point, there are other strategies, “depending on what your history has been. For example, you can market your coverages either through one broker, or you can get two brokers to compete for your business,” he noted.

Such a strategy can be employed occasionally, whether the economy is good or bad, “but in the current economic environment,” he added, “if you have not re-marketed your insurance in the last three years or so, this would be a good time to do it.”

Mike Liebowitz, director of risk management and insurance for New York University and a former RIMS president, said the key to successful renewals is to “get a completed submission in as soon as possible–complete–so an underwriting question can be answered early. Don't wait to get the underwriter against a deadline,” because fewer markets or less capacity might be available at the 11th hour.

Also important is “total transparency about your experience,” according to Mr. Liebowitz, adding that “transparency goes both ways. Talk about your organization and don't hide things.”

He said underwriters are also asking more questions. In the workers' comp world, for example, insurers are looking at concentration of employees, as has previously been the case–but they now want to know details such as, “if a loss occurs, how will your evacuation plan work? They will take this into consideration for your rates and your risk.”

On the liability side, he observed there is plenty of capacity, both in the United States and Bermuda. While he shopped in London in past renewals, this year there was no need. “There is plenty of capacity in the U.S.,” he said. “I'm finding that globally, carriers are happy to front for U.S.-domesticated carriers, making it easy to use a U.S. program overseas.”

Many carriers also are price competitive. “Is Chartis/AIG a factor?” he asked. Referring to the renaming of AIG's commercial insurers, and subsequent market chatter about alleged price-cutting to draw business to a new brand. “Maybe, but there are many new players in my program. I've expanded my coverage, but I'm also using more carriers–four instead of two. I don't want all my eggs in one basket.”

The market remains temperamental, he warned. “We're riding the coattails of the financial industry, which is see-sawing right now,” he said. “I'm also looking carefully at a company's ratings.”

While he has had a successful renewal season, Mr. Liebowitz declined to call the current environment a buyer's market. “Those days are done,” he said. “There are opportunities when you weigh loss experience and costs. If you make a prudent surgical buy, you can do well.”

Because he strives to have information ready in advance for a successful renewal, his process is a year-round endeavor. “In fact, I'm working on Feb. 14 renewals now,” Mr. Liebowitz noted.

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&#039;Buyer&#039;s Market&#039; Doesn&#039;t Mean 2010 Renewals Will Come Easy

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