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While alternative risk financing is now a relatively common tool for many risk managers, the overall soft property/casualty insurance market is stunting new growth in alternative programs.
Ten to 15 years ago, companies using such risk financing approaches as large self-insured retentions, captive insurers and risk retention groups to transfer and finance risk were among the avant garde. But those methods have since matured into more of a standard means to finance many organizations' commercial risks.
But as the commercial property/casualty market remains competitive for most types of coverage and rates are soft, overall growth among traditional self-insurance mechanisms has slowed.
Brokers and risk management consultants say risk managers generally are content with their existing programs.
Those that have never self-insured
are enjoying low rates in the soft commercial market, while those that do selfinsure are mostly unwilling to give up
the control gained by retaining their own risks, despite low rates available in the market.
However, some self-insurers are transferring some of their retained risk back to the standard market to take advantage of soft rates, while others are exploring such options.
"The traditional self-insurance market is in a holding pattern," said Mary Ann Godbout, assistant vp at Conning & Co., an insurance research firm based in Hartford, Conn.
"Companies that are there and are using self-insurance are happy and are staying despite very soft rates in the traditional
insurance market. Companies that are not there are finding that the traditional market pricing is so favorable the temptation to self-insure. . .there is none. They've never gone beyond the price is right," she said.
According to a Conning & Co. report, the alternative market-including self-insurance, captives, risk retention groups and group facilities-represented an estimated 33.2% of the total market for risk protection in 1996. This percentage is little changed since 1991, when Conning estimated the alternative market represented 30.7% of the total market.
Conning estimates that, unless there is a change in the commercial insurance market, the alternative market will represent 32.8% of the total market in 1997 and 1998.
"If I had to categorize the market right now, it would be mesmerized," said Charles N. Fiske, group director for Sedgwick Inc. in Memphis, Tenn.
Smaller companies, those paying less than $100,000 in premiums, are not doing anything different.
Fortune 500 companies may be looking at alternatives but also are not doing much, he said.
"It's the ones in between that are looking for ways to have better balance sheet protection," he said.
Some of this activity is coming from risk managers looking to transfer some of their retained risk back to the standard insurance market.
"I'm definitely seeing some risk managers.*.*.buying down their retentions," said Greg Berg, a principal in the risk management unit of Tillinghast/Towers Perrin in Hartford, Conn. "It's a temporary exploitation of a very soft market."
Tobey J. Russ, president of AIG Global Risk in New York, said the insurer is attracting some formerly self-insured companies because of the softness of the marketplace. Other self-funded companies are reducing the sizes of their retentions, he said.
"With the clients whom I'm dealing with, there is a trend for self-insureds to switch back to traditional insurance," agreed Bill McBurnie, senior vp at Johnson & Higgins in New York.
Specifically, Mr. McBurnie said he has worked with two primary casualty accounts on switching back to the traditional market and another casualty account where the risk manager reduced the company's self-insured retention.
"Just because insurance is cheap, it may not be valued by the client," Mr. McBurnie admits. "But the fact is, the more competitive the insurance market gets, the more likely a corporation, in general, will favor insurance over other mechanisms that involve a greater retention of risk."
As a result, "a lot of corporations are taking an opportunistic view of the insurance marketplace," he said. "They're not necessarily looking to get back to the traditional market, but if the opportunity arises to transfer risk at 25% to 30% of the actuarial value of the risk, some corporations will find that hard to resist."
Low prices have yet to entice a lot of risk managers, however.
At Denver Water Department, for example, even a 30% reduction in general liability and auto rates this year was not enough to persuade the department to switch back to the traditional market.
Denver Water completely self-insures its general and auto liability exposures, but every year it discusses with its board of directors what it would cost the company to insure its liability risks in the standard market, explained James E. Crockett, manager of risk and benefits for the city's water authority.
Estimated premiums to insure its liability risks went from about $2 million a year ago to $1.4 million this year, he said. But that wasn't a big enough enticement.
"Because of our risk and loss controls-we average $125,000 in losses each year-it just doesn't make a lot of sense to pay $1 million in premium for $125,000 in losses," he said.
Switching back to the standard market does not make a lot of sense for Alex Lee Inc., either.
"Two years ago, we put our workers compensation into a self-insurance program," explained John B. Hughes, director of risk management for the Hickory, N.C.-based wholesale grocery distributor. "It was very attractive at the time and a substantial premium reduction. It would just be too expensive to go back to a guarantee cost program," Mr. Hughes said.
"We're content with the way things are," said Mr. Hughes, noting that the company is "coming in flat" in terms of workers comp costs for its April 1 anniversary.
And at Cleveland-based TRW Inc., "it's fair to say we continue to pursue self-insurance more aggressively than we have in the past," said Paul T. Pope, assistant treasurer-risk management.
Douglas G. Hoffman, managing director of Bankers Trust of New York Corp. in New York, said the perspective of whether to self-insure or transfer risk to the standard market may come down to whether one considers himself or herself an insurance manager or a risk manager.
Risk managers will recognize the difference between broad self-funded programs versus a conventional insurance product, which includes problems like frictional costs and coverage disputes, he said.
Dave Lenckus contributed to this report.