Reality Check: Market Heading South, But The Bottom Hasn't Fallen Out...Yet

This trend was echoed by the 119 non-risk managers surveyed–including 80 retail and wholesale agents and brokers. In this segment, while 33 percent expect insurance spending overall for buyers to fall between 1- and 10 percent, 15 percent expect spending to remain the same, 29 percent predict an increase of between 1- and 10 percent, and 12 percent anticipate a boost of 11-to-25 percent.

"Risk managers are taking more control of the insurance cycle as part of their overall risk management strategy," according to John Eltham, North American business leader with Miller Insurance Services Ltd., an independent, specialist, wholesale insurance and reinsurance broker based in London, operating internationally as well as at Lloyd's.

"For example, despite the softening market, many are opting to increase or maintain retention levels and use captives to fund more of their own risks," he noted.

Indeed, despite the general availability of cheaper coverage, nearly two-thirds of risk managers surveyed said they would leave their retention levels unchanged, while 29 percent expect to take on more risk themselves. Only 5 percent said they would cut their retentions in the next 12 months.

The survey–conducted over the phone and via the Internet in February and March on behalf of NU and Miller by Litchfield Research, an independent firm based in Marietta, Ga.–found a wide range of expectations among risk managers on price changes for individual lines of business.

Only a handful said they expect price cuts greater than 24 percent in any particular coverage–including 2 percent of property buyers and 1 percent of casualty shoppers.

However, 59 percent anticipate cuts on casualty risks of between 1- and 24 percent. Also expecting a cut in that same range are 46 percent of buyers of property exposures, 37 percent on directors and officers liability, 26 percent on errors and omissions, and 24 percent on employment practices liability.

However, nearly one-third of those surveyed expect a price increase for their property exposures of between 1- and 24 percent, as record hurricane losses from 2004 and 2005 continue to impact catastrophe-prone regions.

Between 12- and 26 percent of buyers expect price hikes on other lines as well, although a significant percentage of risk managers–ranging from 15 percent (on property risks) to 40 percent (on terrorism)–expect no change.

In terms of their purchase priorities, 97 percent of risk managers surveyed cited price of coverage as at least "somewhat important." However, price–at 63 percent–finished fourth in terms of what is "highly important" to buyers, trailing "breadth of coverage" (85 percent), "financial strength/health of insurer" (73 percent) and "service" (65 percent).

The same pattern emerged among nonbuyers surveyed–indicating that at least in theory, price isn't the most important insurance purchasing factor.

Standing out, however, was the fact that 77 percent of risk managers surveyed called "corporate governance" at least "somewhat important" as an insurance purchasing factor–with 38 percent citing this element as "highly important."

Those results were supported by the fact that comments related to corporate governance were by far the biggest concern cited when buyers were asked an open-ended question about the "main risks faced by boards of large U.S. companies." The overwhelming majority mentioned compliance issues, Sarbanes-Oxley requirements and the threat of shareholder lawsuits–with the adequacy of insurance coverage a prime concern.

Also of note, while a large majority (69 percent) of buyers rate D&O coverage as "highly important," only 35 percent expressed the same sense of urgency for employment practices liability insurance.

Despite all the hoopla about extension of the Terrorism Risk Insurance Act, due to expire at year's end, terrorism concerns do not loom large on the radar screens of many risk managers surveyed.

When asked about the relative importance of various risks buyers are looking to cover over the next 12 months, over half (52 percent) of risk managers ranked terrorism as "somewhat" (33 percent) or "highly" (19 percent) important.

However, one-in-four surveyed said terrorism coverage was "neither important nor unimportant." Twelve percent ranked the exposure as "somewhat unimportant," while 11 percent called the risk "not at all important."

As for pricing of terrorism coverage, responses were all over the map. Forty percent of risk managers expect premiums to remain the same. However, while 21 percent predicted prices would rise between 1- and 24 percent, 12 percent expect a drop in that range, and 22 percent said they simply "don't know."

Among "nonconventional" risks that buyers are looking to cover over the next 12 months, 60 percent of risk managers surveyed said securing coverage for exposures arising out of the growing offshore outsourcing movement is "not at all important." Only 12 percent cited this risk as somewhat or highly important, and just 4 percent currently buy coverage for the exposures involved.

On the other hand, coverage for exposures that result from supply chain or trade disruptions registered as at least somewhat important for 41 percent of risk managers, with 14 percent characterizing it as highly important, and nearly one-third currently buying such insurance.

Coverage for intellectual property exposures also scored high, with 47 percent citing this risk as at least somewhat important–including 18 percent calling it highly important. Nearly half buy such coverage today.

The emerging insurance market for climate-based exposures is not registering with most U.S. risk managers, as 48 percent ranked securing coverage for "emission reduction protection" as not at all important, against only 15 percent who saw it as important at all. Indeed, none of the buyers surveyed currently buy such "green" coverage.

Nearly three-quarters of risk managers queried said carbon emission risks are not on the agenda of their boards. Only 7 percent responded yes to that question, while 21 percent said they are "unsure."

Despite falling premiums and expanding coverage in the traditional market, buyers have not turned their backs on the alternative risk-transfer market, the survey found. Nearly half (49 percent) said they are considering ART options–including captives, finite reinsurance and catastrophe bonds.

Half of risk managers surveyed said it would be at least somewhat important (18 percent, highly so) to establish or increase the use of captives over the next several years. There is plenty of room for growth in this area, as 71 percent of risk managers surveyed do not have a captive in place.

When asked "how your insurance buying might change over the next several years," 92 percent said "minimizing company's risks–more risk mitigation" would be at least somewhat important, with 60 percent citing loss control as highly important. One-third said it would be highly important to "improve the terms of traditional policies."

One very interesting survey result indicates that the large majority of corporate insurance buyers don't believe their firms have benefited from the fact that major brokers stopped accepting contingency fees following probes by then New York attorney general (now governor) Eliot Spitzer and others. The investigations revealed bids were being rigged and accounts steered to select insurers so as to trigger volume-based bonus commissions.

Indeed, 56 percent of risk managers surveyed said the money saved by dropping contingency commissions is being retained by insurers, compared to only 7 percent who believe the savings are being passed on to them in the form of lower premiums. More than one-in-three simply "don't know" where that bonus money went.

Nonbuyers surveyed–most operating directly within the insurance industry–expressed similar doubts, with nearly two-thirds responding that the money saved was being retained by carriers, and only 4 percent seeing buyers enjoying the benefit. One-third "don't know" where those funds went.

In phone interviews with survey respondents, risk managers were often negative when asked whether they felt they "now get better value" from their broker since Mr. Spitzer's probe. A few complained about new broker compensation disclosure policies creating unnecessary complications and paperwork, with one stating they are "not getting good value in exchange."

However, some responded very enthusiastically. One said that post-Spitzer, insurers are "more concerned" in terms of "proving value" and providing "appropriate policies." Another said there's "more pressure on brokers to get a better price. I've been able to take advantage of that."