Brokers renewing insurance policies in January are ringing in the New Year with lower property and casualty premiums for their clients.

A surplus of capacity has not been dented by the catastrophe-related losses of the past several years, brokers report, nor by the merger and acquisition activity of 1995.

Excluding earthquake coverage in California and East Coast windstorm exposures, property rates are down and casualty rates are more depressed than ever, prompting some brokers to ask just how much further casualty rates can fall.

To survive the continued soft market, brokers are becoming more innovative. In addition, brokers are expanding existing or creating new products and services for risk managers.

In addition, brokers say instead of dealing solely on price, insurers are eager to negotiate terms, expand coverages and work on deductibles.

"It's a positive environment for risk managers," summed up Lawrence E. Burk, chairman and CEO of Alexander & Alexander Inc. in New York. "There is capacity available and a commitment on the part of insurers, through their consolidation efforts, to reduce costs and a commitment on the part of brokers to become more efficient operations. This efficiency will be passed along to risk managers in the form of reduced costs, a more efficient distribution system and a greater amount of services," Mr. Burk said.

"Risk managers are doing a great job driving down prices and increasing coverages," said Charles N. Fiske, group broking director for Sedgwick James Inc. in Memphis. "I don't know how much further rates can go. But if a risk manager has something he or she has wanted to do, but has been afraid to try it in the past, now's the time to put (those terms and conditions) out on the table because you'll probably get good concessions in 1996," Mr. Fiske said. "It's a buyers market."

One area brokers said did not have an impact on year-end renewals was the flurry of merger and acquisition activity during the past year, which saw CNA Financial Corp. merge with Continental Corp., Zurich American Insurance Group acquire most of Home Holdings Inc. and Travelers Corp. acquire Aetna Life & Casualty Co.'s property/casualty operations.

Consolidation has had an "unappreciable impact on the commercial market," said John O'Sullivan, a managing director with Marsh & McLennan Cos. Inc. in New York. "For the most part, the companies involved have complimented each other, especially in the case of Travelers and Aetna. There may be slight contractions in capacity resulting from the other deals, but it's too small to notice."

Robert H. Hilb, chairman and CEO of Hilb, Rogal & Hamilton in Glen Allen, Va. said, "Capacity now isn't a problem, but you have to wonder if that could change if consolidation continues. You're seeing it every day among insurers and in the broker ranks, and it looks like it will go forward."

The recent consolidations are "a big win" for risk managers, according to Eric Hein, president of Willis Corroon of Maryland.

Consolidation brings stronger, more financially secure markets, more cost-efficient organizations that offer products and services for lower costs and larger companies that are better positioned to meet customers' needs, he said. "That, to me, is why buyers should not just feel good about '96, but about the prospects beyond," Mr. Hein said.

J. Hyatt Brown, chairman and CEO of Poe & Brown Inc. in Tampa, Fla., has a different view. "These mergers won't result in anything except lost jobs."

Brokers say the excess capacity in the casualty marketplace prompted even lower premium rates during year end renewals.

"The casualty market place is dropping like a rock," said Dave Laabs, executive vp of Willis Corroon of Michigan. "Price drops exceeded our expectations" this renewal season.

"During the last week in December, we had some general liability renewals down 30%," Sedgwick's Mr. Fiske said.

"There is not one liability coverage that is not softer today than it was six months ago, and six months ago they were softer than six months before that," Mr. Hein said. "We're still plumbing the depths to see how far the bottom is, and we're not at the bottom yet."

Willis Corroon's Mr. Laabs said within the past two months he has seen some insurers walk away from liability accounts because the prices were too low and at the same time, "others have literally written a program for two-thirds of the past three years average losses," he said.

One area in which rates are flat to down and capacity is plentiful is workers compensation.

Workers comp is a "phenomenon," Mr. Fiske said. "Two to three years ago, workers comp was devastating even to consider. Now, insurers are killing each other for it," he said.

Rates in such states as California and Florida are decreasing in double digits and Texas is on the brink of double digit decreases, he said. States tend to become very competitive one year after enacting legislation that curtails losses and reduces large pay-outs, he explained.

However, Frank C. Witthun, president and chief operating officer of Acordia Inc. in Indianapolis, said California comp rates, which have dropped between 30% to 40% over the past couple of years, are on the rebound.

"I was just in California last week and it appears a floor's been made on workers compensation rates," he said. California comp rates actually increased 8% to 9% over the last year, but "it clearly it is not back to where they were before open-rating."

Outside of California, comp rates are flat, he added.

Not only are casualty rates decreasing, but property rates are also on the decline, with the exception of earthquake coverage in California and windstorm coverage on the East Coast, brokers report.

Property rates are decreasing anywhere from 5% to 20%, Mr. Fiske said. "It all goes back to too much surplus for too little business."

"Ever since the hurricanes and earthquakes, it's been based on location," added Dave McGurn, corporate vp with Arthur J. Gallagher & Co. in Itasca, Ill. "In the bad areas, the layers of coverage are small and costly."

Given the fact the market continues to remain soft, it is incumbent on brokers and policyholders to explore what else besides price insurers can offer, brokers say.

One such program gaining popularity in the market is long-term risk financing programs, which not only takes the pressure off of annual renewals, but reduces transactional costs for risk managers, brokers say.

"These types of programs are growing in frequency. We've done maybe 35 this time around, which may not sound like much until you compare it to previous years," said John Deitchman, a director and casualty practice leader with Johnson & Higgins in New York. "Most are multiline programs that span five to 10 years in duration."

Annual renewals provide a "great source of uncertainty" for risk managers, brokers and insurers, which is ironic because risk managers purchase insurance to add certainty, said Mr. Hein of Willis Corroon. "Entering long-term agreements adds stability and does what insurance is intended to do," he said, adding the Willis Corroon unit set up more multi-year deals last year than ever before.

Alexander Capital Consultants, an Alexander & Alexander Services Inc. unit, and Swiss Reinsurance Co. are also bracing for the trend with their new three-year excess property and liability product, dubbed "Beta" (BI, Jan. 8)

After years of consulting work with large organizations, "it was very clear that not only risk managers, but (chief financial officers) and treasurers, were voicing a consistent theme with their insurance-frustration with the annual renewal process," said William J. Anderson, managing director of ACC.

Beta is the outgrowth of "listening long and hard to the needs of clients," he said.

In addition to offering new products in 1996, brokers agree the year will also see Lloyd's of London's future determined.

While brokers say they are still placing business with Lloyd's, they are uneasy about its stability as a market.

"Lloyd's is still a questionable market," said Acordia's Mr. Witthun. "We will get clear answers in '96" about the future of Lloyd's, he said. Whether it is successful in transferring all its old liabilities into Equitas Ltd. or ending litigation between Lloyd's members, "it will be the big story of '96," he said.

From a placement perspective, Mr. Hilb said he's still using Lloyd's, "because sometimes they're the only writers. But we look for alternate markets whenever possible. This year will be tell-tale. I'd love to see them get back on their feet."

Gallagher's Mr. McGurn said the problems at Lloyd's have been remedied by domestic insurers who aren't relying on that market for much reinsurance any more. "It could be that insurers have replaced Lloyd's or reduced their reliance on Lloyd's by using Bermuda and other options like simply retaining more business."

Bermuda catastrophe companies are one market brokers are bullish about.

"It's a major marketplace," according to Norman Barham, executive vp and global practice leader for Johnson & Higgins in New York. "The facilities are good, as are the underwriters. You talk to them and they listen. You can get a program written in two days when you present it properly and they like it."

"Bermuda continues to be active for the coverages they were installed for. But now they're on to much more," said Mr. O'Sullivan. For example, he said A.C.E., a traditional excess liability writer, is now into satellite coverage.

Robert Meyers, principal and global property practice leader with J&H in New York, added that "creativity" is what defines Bermuda. "For the Global 500, Bermuda has become a fixture. They have an appetite for solutions. While it may not be exactly like Lloyd's, it is similar is some ways. Capacity is their freedom."