COMPETITION OFFERS CHANCE FOR BETTER TERMS, BROKERS SAY

Risk managers can look forward to a relatively easy renewal period in 1997, brokers report.

The property/casualty market has remained relatively unchanged over the past year despite continued consolidation among reinsurers, insurers and brokers. The relatively few natural disasters last year also contributed to keeping rates low this renewal period.

But the impact of the recent series of winter storms and flooding that has hit the western United States has yet to be determined.

Preliminary estimates have the storms causing $280 million in insured damages (see story, page 1).

Overall, the market is as competitive as ever, with ample capacity giving way to flat or decreasing rates and broad terms and conditions, according to brokers.

"Pricing continues to be pretty predatory. Companies are scraping around, trying to write premiums-and at lower prices," said J. Hyatt Brown, chairman and chief executive officer of Poe & Brown Inc. in Daytona Beach, Fla. "Today, everyone is willing to do something extra to lock in business. We don't see any changes in 1997. It's going to be just as competitive as in 1996."

"Everything is pretty much continuing as it did in '96," agreed Charles Ruoff, executive vp at Sedgwick James Inc. in New York. "The market is very reasonable and offering enhanced terms and conditions. Pricing is still relatively soft in basically all lines."

Specifically, Bill McBurnie, a senior vp at Johnson & Higgins in New York, said he has seen reductions anywhere from 20% to 40% in rate levels for casualty policies, especially primary casualty, umbrella and excess liability.

And "workers compensation continues to experience unprecedented competition," said Gary Van der Voort, president of the brokerage service division of Arthur J. Gallagher & Co. in Itasca, Ill. While it was "the problem coverage four to five years ago, it is now the market's most competitive area."

Frank C. Witthun, president and CEO of Acordia Inc. in Indianapolis, said workers comp rates in California, however, are starting to level off after dropping as much as 60%.

"They're not going up, but clearly they're not going south," he said.

The only areas where brokers see real capacity and pricing problems are in the windstorm- and earthquake-prone locations.

"Coastal wind and earthquake exposures for large property buyers are extremely difficult to place," Mr. Van der Voort said. "Prices are not coming down and capacity is not increasing."

Mr. Brown said he is specifically seeing higher deductibles, less capacity and higher prices for property insurance in the Southeast, the Eastern seaboard, Florida and Texas.

Because of the market's competitive nature in all lines of business, brokers say underwriters more than ever are willing to adhere to risk managers' specific program wants and needs.

It is this kind of atmosphere that is prompting brokers to recommend that their clients take down their retentions and develop contingency plans in case the market hardens.

"The rate of decline has slowed, but the attitude among underwriters remains, 'Whatever it takes to keep the renewal, I'll do,'*" said Eric Hein, president of Willis Corroon of Maryland in Hunt Valley.

"I've seen underwriters set a price for the business at or below expected losses," he said, referring mainly to liability policies. "It's absolutely astounding.

"Insurers are so hungry for premium dollars we will see more first dollar programs and lower deductibles as underwriters continue to chase premium dollars" in 1997, Mr. Hein predicted.

"The market continues to be competitive, but more importantly, most insurers have adopted a posture where they'd like to be challenged by a risk manager's wish list," agreed Larry R. Sorensen, executive vp-corporate marketing at Aon Risk Services Cos. Inc. in Chicago.

So now is the time for risk managers to step back "and design a program of their dreams," he said. "I believe they'll find one or two underwriters who will be willing to deliver a quality long-term program that meets their design."

While multi-year programs have been a hot topic among market players, brokers' experiences with them differ. Some say the multi-year program business is in demand, while others see little interest from risk managers.

"Everyone is looking at multi-year combined programs," said Gary Gatewood, managing director and head of Marsh & McLennan Cos. Inc.'s global brokerage operation in New York.

Some clients do want multi-year coverages because they want to lock in rates, Acordia's Mr. Witthun said, noting this is especially happening in the placement of high-risk coverages.

"Anyone who wants a multi-year deal just needs to ask for it," added Mr. Hein of Willis Corroon.

But Sedgwick's Mr. Ruoff said multi-year policies have not taken hold as he thought they would.

In general, risk managers "do not want to put all their eggs in one basket. They like to keep their options open," he said.

Mr. Van der Voort also has not seen growth in the multi-year programs.

"I haven't seen an overwhelming interest because buyers are seeing their renewals coming down year after year," he said.

Expanding the multi-year program, Aon's Mr. Sorensen said risk managers also are asking for blended programs with a single limit under a multi-year period.

Generally with financial institution and major corporate clients, Mr. Sorensen said he has seen success in blending property and casualty programs as well as professional indemnity programs with directors and officers liability, fiduciary liability and employment practices liability coverages.

The alternative market, alternative risk financing strategies and the use of capital markets to hedge risks continue to be hot topics for risk managers, brokers report.

"The alternative market is still a very viable alternative for large buyers, and group captives and group purchasing programs are an attractive alternative to middle market buyers," Mr. Van der Voort said.

"Risk managers are looking beyond traditional insurance risk categories," added Mr. Ruoff of Sedgwick James. They are beginning to look to banks and other financial institutions to transfer or hedge their risks.

Mr. Ruoff is particularly bullish about the capital markets. "I think that by the year 2000, it will be a $5 (billion) to $6 billion market."

"We're seeing insurance programs that are becoming more specifically responsive to our clients' financial goals," said Mr. McBurnie of J&H.

For instance, one new innovation involves retentions that fluctuate automatically as clients' profit margin varies with certain commodities, he said.

The goal is to find "more innovative and creative approaches" that tie in closely with the client's business. Increasing the amount of understanding and interaction between broker and client creates "true financial partners in risk."

As the trend continues, Mr. Hein said the pace of convergence among insurance, securities and banking markets will accelerate.

Eventually, risk managers will move from pre-loss funding through insurance premiums to post-loss funding through a debt loss payment to a loan facility, he predicts.

The favorable buyer's market is prompting some brokers to recommend that clients lower their retentions.

"We've spent the last five years looking at increasing retentions; it's now time to look at the other side of the coin," Mr. Hein said.

"It's hard to get buyers to go to higher retentions, but when they're there, it's even harder to get them back down," he said. But "that's exactly what we're looking to do. We talk to people about doing that all the time. We tell them to take advantage of the market. We absolutely are seeing it."

While some risk managers maintained their retentions and took a price reduction, Mr. Ruoff said he has seen other risk managers cut their retentions on property and casualty accounts to $250,000 from $500,000 while paying the same premium.

"Risk managers are lowering their retentions because the market is offering terms more favorable," he said.

But how long can this environment last?

"There has to be a bottom, but we're still plumbing the depths to look for it," Mr. Hein said.

"Risk managers are so much more informed about their risks today than five years ago," he said. And the more informed they are about their losses and risks, the more retention they assume, therefore leaving less premium for insurers. With fewer premiums in the market to write, the more insurers compete for them.

"It's a self-fulfilling spiral," Mr. Hein said.

But if one looks at programs today and where prices have gone and where loss levels are, "there is not a lot more to squeeze out of this thing," he said. "If you look logically and you see underwriters setting prices below expected losses, you have to say, 'Can it get any lower?'

"If I were concerned about getting close to the bottom, and if I were a buyer I would be, I would get a three-year program" that locks in rates, he said.

Indeed, Mr. Ruoff said now is the time for risk managers to develop a contingency plan in case of a market change.

"It's a good time in terms of availability," he said. But "it's very important for risk managers today, while the seas are calm, to think about their strategy in the long term if the market does change."

Consolidation is one area that while heavy in activity has yet to effect a market change. Instead, brokers say it is more of a boon for risk managers.

If anything, acquisitions have resulted in "greater specialization, new services and more product development," said Aon's Mr. Sorensen, whose company was involved in the largest broker acquisition on record late last year.

After buying Bain Hogg Group P.L.C., the world's 11th-largest broker, in October, Aon bought Alexander & Alexander Services Inc., the world's fourth-largest broker, in December (BI, Dec. 16, 1996).

On the heels of the Aon deal, London-based JIB Group P.L.C., the world's 10th-largest broker, announced plans to merge with Lloyd Thompson Group P.L.C. (BI, Dec. 23/30, 1996).

One only has to look to the reinsurance market last year to find even more merger and acquisition activity.

"As far as any effect on renewals, it will not come about until there is a bit more consolidation," Mr. Ruoff said. "There are still choices around. It is when those choices become more limited that renewals will be affected. There is less competition when there are fewer participants."

While insurance buyers may have fewer choices due to the acquisitions, "they have more financially sound companies to choose from because the weaker ones are being merged or acquired," Mr. Hein said.

"As long as there are three firms, it's enough to create a market," he contends. And those three firms will "be better capitalized with more resources and a better understanding of cost. We don't need 2,000 property/casualty insurers in the U.S."

While the property/casualty market remains the same, risk managers can look forward to a more financially sound Lloyd's of London.

Lloyd's announced in July its first profits in five years, and in September Lloyd's reconstruction and renewal plan was approved.

"Now that (the R&R plan) is behind Lloyd's and it appears to have a probable strong future, the buyer's interest in Lloyd's will be enhanced," Mr. Van der Voort said.

"There has probably been a sense of relief experienced by many loyal customers that valued Lloyd's expertise, particularly in aviation, marine, reinsurance and (excess and surplus)," Mr. Sorensen said.

Lloyd's will "be a lot more active in '97," Mr. Ruoff predicted. "It will keep the market competitive."