ART Lovers Eye Property Reinsurance Trends

The ART segment consists of property-casualty companies that provide insurance to individuals and groups that retain some of the insurance risk. Alternative products such as finite risks or catastrophe bonds are not included, however.

The segment can range from large risks with a high self-insured retention, to captives that retain exposure from their members. Using a broad definition of ART, including any type of self-insurance or non-traditional coverage, some of the more common ART carriers benefit from reinsurance or contracted services including pools, risk retention trusts and joint insurance funds for such groups as schools and municipalities.

Typically, ART involves organizations retaining more risk because they have a greater incentive for loss prevention and controlling claim costs. With more standard insurers and reinsurers taking firm positions on what types of businesses they will write, and at what cost, the ART segment is a growth area in the industry.

ART organizations provide coverage that their clients may have trouble obtaining at a price they can afford in the standard market. Some examples include liquor liability coverage for bar owners, public officials' and educators' legal liability for municipalities, and product liability lines for some manufacturers.

Captives and other ART organizations share many of the same challenges faced by standard insurance carriers. They want stability in pricing and are looking for ways to have more control over their products and the quality of their services.

Through reinsurers, an insurance company can find it easier and less expensive to broaden coverage in new areas, since they do not have to add the personnel, resources and expertise that are necessary to do it themselves. A specialty reinsurer can combine reinsurance financial capacity with a complete set of underwriting and risk management services, including risk selection, product design, managing filings, inspections and claim processing.

Most captives typically provide casualty coverage to their insureds. But today, more ART organizations are joining standard insurance companies in adding products such as equipment breakdown, workers' compensation and property coverage to their programs.

In the case of a captive, a specialty reinsurer can provide the underwriting, claim and loss control services to a direct writing captive that issues policies and directly covers the risk. The reinsurer also can act as a licensed, recognized "fronting company that issues policies to a fronted captive owner, providing insurance certificates and adjusting claims. These are similar to the turnkey services that a specialty reinsurer provides to traditional insurance carriers so they can add coverage at a lower cost.

A prime concern in today's market one that is too often underestimated is the quality of reinsurance capacity. Volatility in the reinsurance markets has made it more difficult for insurers and ART organizations to find capacity with financial strength and program flexibility.

Some reinsurers have been downgraded and others have withdrawn from sectors of the market. At the same time, standard insurers are facing increased competition, including foreign carriers, and there is renewed pressure on their own ratings and reserves. These conditions have some insurance companies restructuring their reinsurance programs, and they need supplemental property reinsurance to help fill in the gaps.

Like other insurance companies, ART organizations are adding equipment breakdown and property coverage as they lose business to carriers with property and packaging capabilities. As many choose to reinsure that coverage, it is essential that they focus on providers that have financial security and can accommodate their needs.

A specialty reinsurer can offer coverage and services to help insurance companies become more competitive without building costly infrastructure. But the quality of the capital behind this reinsurance support should be a key factor in selecting a reinsurer. It is most important that a reinsurer have the financial resources to be there for your organization and your clients when you have a loss that must be paid.

Dave Schraeder is vice president at The Hartford Steam Boiler Inspection and Insurance Company, responsible for business development in the Alternative Risk Segment. Based in Houston Texas, he is also responsible for the companys Western Region.

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Some of the more common alternative risk-transfer mechanisms being used include:

Pools which often resemble insurance companies. These usually are managed by an administrator and can employ third-party administrators to settle claims.

Captives including single-parent, multi-parent and agency captives. These are insurance companies organized to insure the risks of shareholders or their affiliates, such as a large corporation or an association of related businesses. They also can be sponsored by one or more independent agents. Captives often provide coverage that is not available in standard markets.

Specialty-program companies these companies normally write business through a managing general agent, with homogeneous classes within each program. The company may write numerous programs with different MGAs, who often compete against standard commercial package policy or business owners policy markets.

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.