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Posted On: Jan. 12, 1997 12:00 AM CST

Financial loss control efforts seem to be paying off for highly protected risk insurers.

By increasing rates, cutting back their exposures and applying more stringent engineering requirements, HPR insurers are likely to post good results for 1996.

The turnaround comes two years after a sharp deterioration in results for some of the Factory Mutual insurers and the Industrial Risk Insurers pool in 1994.

The HPR insurers generally have been less willing to follow the downward trend in property insurance rates, though the soft market has restricted them from making many large rate increases, said Gary Marchitello, managing director-global property practice at Aon Risk Services Co. Inc. in New York.

"They have been more conservative than usual, but the market has been so soft that it's hampered their ability to get rates where they think they should be," he said.

The turnaround was most pronounced at Hartford, Conn.-based IRI. In 1994, IRI's net loss was $163.3 million. IRI began raising rates and altering the makeup of its book of business but two large losses in 1995 helped push its net loss to $438 million.

The property insurance pool's strategy of writing fewer and better risks finally paid off in 1996, when IRI enjoyed an $11 million profit, said Gail P. Norstrom, president and chief executive officer.

"We've got a bit smaller and a bit more focused," he said.

In 1996, IRI had gross premiums of $500 million compared with $643 million in 1995.

Part of the decrease in premiums was due to IRI's decision to cut back on oil and petrochemical risks and to restructure its power generation business, Mr. Norstrom said.

IRI currently writes only power generation accounts in excess of $100 million, whereas it formerly had also written primary coverage, he said.

Although rates are soft and getting softer in most areas of the property market, IRI saw its rates for highly protected risks increase by 5% overall in 1996, Mr. Norstrom said.

IRI also improved its results by reducing its capacity for certain risks and sharing more risks with other insurers, Mr. Norstrom said.

"We had become very concerned about underwriters' ability to quantify the risks," he said.

A restriction of capacity has been the most noticeable aspect of HPR insurers' efforts to improve their results, said Frank Gundersen, a managing director at Marsh & McLennan Inc. in New York.

"When they see an increased (maximum foreseeable loss estimate) they cut capacity back and we have to look for other insurers to complete the program," he said.

In the past, HPR insurers were far more likely to individually cover complete programs, Mr. Gundersen said.

"There is a much greater willingness to share risks," agreed Mr. Marchitello of Aon.

Other HPR insurers did not see losses as severe as IRI's, but they still pursued new strategies to improve on the poor results of 1994.

Arkwright Mutual Insurance Co. of Waltham, Mass., has improved its results in part by becoming more focused on individual business areas and creating specific units to serve those different businesses, said Wolfgang Friedel, senior vp.

"We have customized our products for specific industry groups," he said.

For example, risks that are handled by Arkwright's education unit will have to meet safety engineering standards designed specifically for educational institutions, Mr. Friedel explained.

"The recommendations that we make to them may be more on the human element side of the risks than the actual physical protection, so we reduce our operating expenses and improve our service to our customers," he said.

For the first nine months of 1996, Arkwright made a $34 million profit compared with a $31.7 million profit in the same period of 1995. For all of 1994, Arkwright posted a $31.8 million loss.

Allendale Mutual Insurance Co. of Johnston, R.I., is more rigorously imposing safety requirements at the sites it insures than a few years ago, said Mike Turner, vp-international.

"We had not been working closely enough with the customers," he said.

Allendale is now, for example, more actively working with its customers in windstorm-prone areas to secure roofs and also with clients in earthquake zones to minimize potential damage to sprinkler systems in the event of a quake, Mr. Turner said.

Allendale does not release nine-month figures, but it expects profits to increase in 1996 from $42 million in 1995 and the $16 million profit in 1994.

All HPR insurers are focusing much more on catastrophe loss exposures than they had in the past, agreed Mr. Friedel.

"Through a combination of engineering and leaving some customers behind, we have significantly reduced our exposure to windstorm," he said.

And IRI is conducting more detailed analysis of risks located near the New Madrid earthquake fault zone in the Midwest, said Mr. Norstrom.

"It is only in the past year that we have had the computer models that we need to assess it," he said.

Protection Mutual Insurance Co. of Park Ridge, Ill., has continued to judge every account on its own and apply rate increases where they are needed, said CEO James W. Black.

However, he added, that strategy is becoming increasingly difficult as the insurance market becomes even softer than it was a year ago.

"The key is to keep the accounts that you want to keep and should keep and let the others go to the uninitiated," Mr. Black said.

Protection Mutual expects to see a significant increase in profits this year, but that is partly due to the relatively few major catastrophes in 1996, he said.

"The rates are so low that they don't allow for any catastrophe-type loadings, so, as long as we don't have any bad catastrophe years, we can be pretty profitable," Mr. Black said.