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HAMILTON, Bermuda-The soft liability insurance market is creating more opportunities for risk managers shopping for coverage in Bermuda.
As rates for excess liability and directors and officers liability insurance continue to slump, Bermuda's insurers are seeing the premium income from their traditional markets fall.
Bermuda's one-time excess and D&O specialists are softening the blow of the market forces, however, by offering flexible coverage and continuing to add to an array of new products.
Some of the diversification strategies have been more successful than others, but by offering more and more new products and services, most Bermuda insurers have avoided sharp declines in premium income.
Now risk managers traveling to Bermuda can buy a wide range of products, including coverage for: excess liability; D&O; professional liability; political risk; aviation; excess property; reinsurance; satellites; multiyear combined aggregate; employment practices liability; wrap around punitive damages; currency trading coverage; and financial insurance.
Some of the additional and flexible coverages may last only as long as the soft liability market, brokers say. But for now, at least, the Bermuda insurers are eager to please.
And with the addition of Zurich Global Energy Ltd. to offer energy property and liability coverages this year, the buyers' market looks set to continue in Bermuda.
"Diversification has been the saving grace of the market," said Paul Scope, president of broker Park International Ltd. Park added 13 new insurance accounts last year; nine were for property coverage, he said.
Clients also are showing interest in the non-core liability coverages of the Bermuda insurers, said Michael G. Foulger, executive vp at Park. For example, the employment practices liability coverage written in Bermuda will likely take off this year, he said.
When insurers began to offer the coverage last year, clients were slow to take it up, in part because they thought they had coverage for the risk under other existing policies, Mr. Foulger said.
But with several high-profile and costly employment practices-related settlements taking place last year, more buyers are interested in the dedicated coverage, he said.
"People presumed that the coverages in the EPL policies were picked up by general liability and D&O policies, but now they are sitting down and seeing whether they really do cover EPL," Mr. Foulger said.
Buyers are also becoming a lot more interested in the multiline combined aggregate coverages Bermuda insurers offer, brokers say.
X.L. Insurance Co. launched its Risk Solutions product with CIGNA Property & Casualty Insurance Co. last year; it offers large-limit, multiline, multiyear coverage. Other Bermuda insurers have not offered a definitive multiline product, but they have started to offer tailor-made multiline and basket aggregate coverages.
The coverage is attractive to clients that have hard-to-place business, said Sheila Nicholl, vp at J&H Intermediaries, a unit of what is now J&H Marsh & McLennan.
"It works well for clients who have risks that are difficult to place in the market because it gives them access to large blocks of multiyear capacity at a fixed price," she said.
Multiline coverages are proving attractive to clients, agreed Gregory W. Springer, president and chief executive officer of Aon Risk Services (Bermuda) Ltd. "It will be one of the biggest growth areas over the next two to three years," he said.
The products come together with the overall balance sheet protection many risk managers are seeking to establish, Mr. Springer said.
Multiline coverages are not new to the insurance market, several brokers point out. Some insurers offered the coverages in the early 1980s when the liability market also was soft. However, the coverages soon disappeared when the market hardened in the mid-1980s, they say.
While clients must be wary that the multiline products may only last as long as the soft market, there is a greater chance the products will survive a change in the market this time around, said Karen White Lawson at Alexander Howden Group Ltd.
The products are based on net-line capacity rather than relying on a large amount of reinsurance as the old multiline products did, so the customers have a closer relationship with the insurer providing the capacity. Also, the products are multiyear deals, so they are less likely to be disrupted by sudden swings in price, she said.
And at the moment, the only direction excess liability and D&O rates in Bermuda are heading is down, Ms. Lawson said. D&O rates fell about 10% to 15% in the past year as buyers found plenty of capacity around the world, she said.
Bermuda insurers added to the range of products available to clients with X.L. offering primary D&O coverage, which it calls IDOL, and ACE offering a pared-down version of its own primary coverage, which it calls ACE Plus.
But with the plentiful capacity available, demand for the new products is limited, brokers say. In particular, clients have shown little interest in ACE Plus, as it does not offer the broad coverage many clients are seeking, said Ms. Lawson.
The product has suffered from the overall market conditions, agreed Mr. Scope of Park.
"Some clients like it, but it came at a particularly tough time in the D&O market," he said.
Excess liability rates are seeing even steeper falls, brokers report.
In particular, energy liability rates are dropping by about 20% in Bermuda, they say. But this is still short of the 40% to 50% reductions that can be found in the London market.
In general, excess liability rates are falling 15% to 20%, said Mr. Springer of Aon.
The current market is as soft as it was in 1983-84, said Colin C. James, president and CEO of Atlantic Security Ltd. "Buyers are dictating prices and terms. . .prices are down about 20% on average, but it depends on the class and how much the buyer pushes," he said.
X.L. Insurance Co.
X.L. is stepping up its expansion strategy to embrace the purchase of outside books of business, investing in an investment management company to help it develop financial products, as well as offering new products on its own and in conjunction with ACE.
The broader strategy follows three years of diversifying product lines, usually to ones related to its core excess liability and D&O business.
Over the past year, X.L. bought two rivals' books of business. First, it acquired the rights to renew the business of the American Excess Insurance Assn., and then it bought Railroad Assn. Insurance Ltd.
AEIA has 120 contracts, and X.L. is renewing about 60% of the contracts as they expire, said Brian M. O'Hara, chairman and CEO.
The amount it pays in the AEIA deal will depend on how many accounts it renews. Although X.L. will have first bite at the accounts, it still will have to compete for the renewal with other insurers, including Bermuda rival Starr Excess Liability Insurance Co. Ltd., which last year brought on Clinton N. Greene-the former president of AEIA's management company-as senior vp.
In the RAIL deal, X.L. took on $22 million in three-year prepaid coverage for railroads in the mutual insurer.
Another X.L. investment was the purchase of 30% of Pareto Partners, an investment management firm with operations in London and New York. X.L. will use the expertise available at Pareto to develop insurance products to cover financial risks, including coverage for currency risks, Mr. O'Hara said.
The financial products will likely be offered through X.L.'s Risk Solutions product.
So far, Risk Solutions has six full policyholders with a total $25 million in gross written premium. Another eight have purchased property coverage under the program with the intention of including other lines as their existing insurance contracts expire, Mr. O'Hara said.
This in part accounted for X.L.'s dramatic 122% increase in gross property premiums to $40.7 million in 1996 in 1994.
Risk Solutions provides $600 million in combined single aggregate annual limits, up from $400 million last year, and $300 million per occurrence, up from $200 million last year. The programs run for three- to five-year terms.
Originally, only X.L. and CIGNA covered the programs. Now other insurers can be included on the program along with X.L. and CIGNA.
"Since we launched the joint initiative it has become apparent that our capacity isn't enough to complete all of the programs, and additional partners were needed," said Robert J. Cooney, president and chief operating officer of X.L.
Also, policyholders who had existing relationships with other insurers wanted to include them in the program, he said.
The program frequently has replaced X.L.'s existing multiyear program, MAXL, he said.
X.L. continues to offer MAXL and this year introduced a deferred-premium option for the product. Policyholders can pay the premium at the end of the three-year term if no losses are reported during the policy term. Policyholders that choose this option must pay an annual interest payment, currently 6.5%.
Another product X.L. began to offer last year was EPL insurance with limits of $100 million excess of $1 million. So far, 17 policies have been sold.
"We've had to be very selective," said Mr. O'Hara. "We've declined a good number of accounts where the risk management procedures were not good enough and there was an accident waiting to happen or it had already happened."
Last year, X.L. also started offering first-dollar primary D&O coverage with $50 million in limits. The product, called IDOL, is similar to ACE's CODA coverage.
While X.L. and ACE compete in the D&O market, the latest product to be offered by both companies is a combined political risk product with Risk Capital Reinsurance Co. (BI, March 10). The three companies formed Sovereign Risk Insurance Ltd. to offer limits of $50 million per project and $100 million per country. ACE and X.L. will underwrite 45% of the risk each, and Risk Capital will underwrite 10%.
Bermuda brokers report strong initial interest in the new product.
Another example of the sometimes close relationship between ACE and X.L. was seen earlier this year when the two won government approval to develop a new office building on the site of the former Bermudiana Hotel in Hamilton.
X.L.'s established excess liability and D&O coverages saw little growth in 1996 due to the soft liability insurance market, said Mr. O'Hara.
Gross premiums for general liability in 1996 fell 3.3% to $432 million. D&O gross premiums increased 11.3% to $27.6 million.While rates have fallen in most markets, X.L. has avoided drastic rate reductions by attaching at a higher level, he said.
"We don't think it's a bad trade-off to give up a little premium in return for moving a little further away from the risk of loss," Mr. O'Hara said.
The soft market also has hit COAXL, the insurer's less extensive liability product for smaller companies, he said. The product has seen little demand since its launch in 1994.
Overall, X.L.'s gross premiums increased 4.5% to $729.4 million in 1996. After adjusting for multiyear premiums, gross annual premiums edged up a little more than one-hundredth of 1% to $590 million in 1996.
The favorable investment market helped push net income up 48.5% to $494.3 million.
In the future, X.L. expects to see more business from new offices opened in foreign markets. In late 1996 its reinsurance arm, X.L. Reinsurance Co. Ltd., opened a contact office in London, and early this year X.L. opened an office in Sydney.
ACE's strategy in 1996 followed its now-familiar line of diversification.
Compared with its excess liability specialist beginnings in 1985, ACE now covers a broad spectrum of risk in a variety of locations and through several different vehicles.
The insurer writes liability, property, aviation, satellite, and financial lines in its main office in Bermuda; through its acquisition of Tempest Reinsurance Co. Ltd. it writes property catastrophe reinsurance; in London, it has its own contact office as well as one of the largest corporate holdings in Lloyd's of London; and later this year it expects to diversify further in Europe by opening a Dublin office.
"1996 was a terrific year for us, because we saw our new lines of business come to fruition, and we acquired our whole Lloyd's operation as well as Tempest," said Brian Duperreault, chairman, president and CEO.
But it was not all smooth sailing. The company had to beat off a last-minute rival bid for Tempest; it has lost satellite underwriters to another rival; it failed in its attempt to place a capital markets-based line of reinsurance; and, like other liability insurers, ACE is watching premium income fall on its excess liability and D&O accounts. Despite those setbacks, ACE is now a stronger company than when it depended solely on its original lines of business, Mr. Duperreault said.
One of the main events in 1996 for the company was its investments in Lloyd's. ACE bought Methuen Group Ltd., which has six syndicates, and it acquired seven of the nine former Sturge syndicates managed by Ockham Holdings P.L.C., including two of the largest aviation syndicates in Lloyd's.
In 1997, ACE will control more than 750 million pounds ($1.26 billion) of capacity at Lloyd's.
Although Lloyd's has suffered numerous problems over the past several years, the market is well-positioned for the future, and the syndicates ACE now controls were well-managed even during the bad times at Lloyd's, Mr. Duperreault said.
"The two organizations have excellent underwriters who had done well in spite of the conditions at Lloyd's, and those are the kind of people we want in the company," he said.
William J. Loschert, the former head of underwriting at ACE, will head the Lloyd's operations. He moved to London last year to become chairman of ACE UK Ltd.
Mr. Loschert has a reputation in Bermuda as a strong manager. However, ACE does not plan to make the Lloyd's operations a clone of the Bermuda operations, Mr. Duperreault said.
"The active underwriters will manage their own syndicates within our overall business plan. . .we don't want to lose the entrepreneurial spirit you find in Lloyd's," he said.
ACE also entered the Bermuda property catastrophe reinsurance market last year through the purchase of Tempest for about $950 million. However, ACE had to fight off a last-minute bid from rival Bermuda cat reinsurer International Property Catastrophe Reinsurance Co. Ltd.
Overcoming the IPC offer was the first of a few problems ACE faced over the past year.
Earlier this year, ACE lost most of its satellite underwriting department to the Brockbank Group P.L.C., a Lloyd's managing agency in which Bermuda-based reinsurer Mid Ocean Reinsurance Co. Ltd. is the majority owner. Chuck Rudd, former senior vp for satellite underwriting and his underwriting staff, Inken Gerlach and Jeff Sadler, all joined the rival in London. ACE still is writing satellite business, and it will replace the staff, Mr. Duperreault said. For now, the business is being written using other resources in the company, including satellite underwriters in London.
Another hiccup in ACE's plans was the failure of a catastrophe-linked bond last fall that would have provided additional property reinsurance coverage for ACE.
The $25 million to $30 million bond offering arranged with Goldman Sachs was to have offered a yield of about 7.75% if industry losses did not exceed a set amount. ACE would not reveal why the issue failed, but the company plans to continue investigating securitization deals.
ACE also has faced a common foe of many insurers: the soft liability insurance market.
"There is a lot of capacity out there, and it affects us in a very particular way because we are at the top of most placements," Mr. Duperreault said.
Like X.L. and Starr, ACE is attaching to programs at higher levels and is exposed to less risk but also takes in less premium as a result of the shift.
Net premiums for excess liability fell 15.4% to $202.3 million in 1996.
The D&O market also remained competitive in 1996, and despite the launch of a new pared-down coverage for smaller companies, ACE Plus, net premiums fell 7% to $97.6 million.
But ACE did see substantial growth in many areas it entered in 1995. For example, excess property premiums grew to $13.9 million from $5.3 million, and financial lines rocketed up to $119.2 million from $9.2 million.
The financial lines products often include finite risk insurance but are tailor-made to fit client needs, Mr. Duperreault said.
Overall, ACE's net premiums leapt 41.9% to $602.7 million in 1996. Net income increased 21.9% to $289.7 million.
ACE also increased the amount of reinsurance it buys. Ceded reinsurance premiums increased 118% to $43.1 million. The reinsurance is mainly for property and aviation risks.
In 1997, ACE may derive more business from Europe as it will likely open an office in Dublin, Mr. Duperreault said.
ACE formed a reinsurance captive in Dublin in early 1995 (BI, April 24, 1995), but a larger operation will likely be opened there this year, he said.
Starr Excess Liability
Insurance Co. Ltd.
Starr increased its premiums, capacity and product line in the past year.
But while the company has grown in successive years since its debut in 1993, that growth has slowed in the first few months of 1997 as energy rates in particular have tumbled, said Mr. Greene, senior vp.
Firmer pricing in professional liability, employment practices liability and other liability lines may help compensate for the drop in excess and D&O rates and fuel premium growth, he said.
Also, renewing business available to the market from AEIA, which Mr. Greene formerly managed before it was wound up, also may boost premiums this year, he said.
"The market is very difficult at the moment," Mr. Greene said.
Starr itself has contributed to the competitiveness in the market by increasing its excess liability limits to $150 million excess of $25 million for most programs from $100 million excess of $50 million. Starr also dropped its D&O attachment point to $25 million from $50 million, but it continues to offer $50 million in limits for D&O.
In addition to the increased limits, in February Starr launched a formal, follow-form professional liability policy.
In the last six months of 1996, Starr wrote $4 million in professional liability premiums on a manuscript policy, and its success prompted the insurer to offer the coverage on a more formal basis, Mr. Greene said.
"We've been able to write quite a bit of professional liability business on good terms," he said.
Starr writes limits of $25 million excess of $25 million for professional liability business. The coverage is offered to non-bank financial service companies and other miscellaneous professional liability risks, but not to higher-risk banking professionals, architects and engineers, lawyers and accountants.
The insurer also writes professional liability and D&O business on a combined aggregate basis, Mr. Greene said. In the combined contracts, the professional liability exposure has a sublimit of $25 million, or the limit for the whole policy is $25 million.
Starr also writes some EPL business, but it does not yet have a formal EPL policy.
Starr also is increasing the number of three-year policies it writes as more clients look for long-term coverage, Mr. Greene said.
Overall, Starr's gross premiums increased 15.9% to $116.7 million in 1996.
Almost 75% of the business was derived from the United States, and 10.4% was derived from Britain.
Excess liability premiums increased 10.4% to $106.1 million in 1996, and D&O premiums increased to $6.1 million from $4.6 million.
The company also drew down a further $100 million in capital from its shareholders to write its increased limits. Starr now has $263.2 million in shareholders equity and a further $300 million available to be called from shareholders.
Taking a flexible approach to non-traditional coverages is proving to be the key to success for Chubb Atlantic Indemnity Ltd.
By offering coverages not available to Chubb Corp. clients in the United States, the Bermuda subsidiary has enjoyed strong premium growth since it set up in 1994.
And increasingly, Chubb Atlantic is writing more business coming to the Bermuda market that has no connection to its parent in Warren, N.J., said R. Lincoln Trimble, vp, underwriting manager property/casualty. Thirty percent of the business it writes is unrelated to Chubb Corp.
But coverage for Chubb clients that cannot be written in the United States is the core business for Chubb Atlantic.
In particular, wrap around punitive damages coverage is popular with U.S. clients, Mr. Trimble said.
The demand is fueled by the inability of policyholders to buy the coverage in the United States, as 24 states are either undecided or have ruled against allowing punitive damages to be insured, he said.
Like other Bermuda liability insurers, Chubb Atlantic is seeing an increase in demand for multiyear, multiline, single aggregate coverages, he said. "Often it is for D&O and E&O coverages but we will consider any combination of lines," Mr. Trimble said.
Indeed, brokers report that Chubb is the most flexible liability writer in Bermuda. That flexibility has helped push gross premiums up 53.1% to $17.3 million in 1996.
Chubb Atlantic also is attracting more business since it increased its limits to $50 million from $25 million in October last year, Mr. Trimble said.
Future growth at Chubb Atlantic will likely center on other coverages difficult to place in the United States, such as a secondary product recall policy, he said. "We get approached all of the time to do things that are just hard to place, and as long as they make sense, we are willing to take a look," Mr. Trimble said.
Due to the insurer's growth, Chubb Atlantic will have its first president based on the island this year when Christopher Longo moves down from Warren, N.J. He formerly was manager of the worldwide umbrella department.
Lexington Insurance Co.
The soft liability market and the increase in capacity at other insurers on Bermuda led to a drop in gross premiums at Lexington Insurance Co.'s Bermuda branch.
Lexington's Bermuda premiums fell 40% to 60% to $2 million to $3 million last year, said President Kevin Kelly. And as the insurer was writing little business on the island, it pulled its underwriter, Kevin Moss, back to the United States. He still travels to Bermuda when he needs to write business there.
Lexington offers $25 million excess of $25 million in liability capacity. It will consider some risks excess of $15 million, but the market is so soft there is little opportunity to write much good quality traditional excess liability in Bermuda, Mr. Kelly said. "We'll maintain a low profile, but we are there for the long term," he said.
Oil Insurance Ltd.
Oil Casualty Insurance Ltd.
Oil Insurance Ltd. had a good year in a difficult market, says Jon R. King, president and CEO of the mutual energy insurer.
The main reason for the good results was an absence of any large losses. The company wrote little new business.
Net premiums written at OIL for 1996 fell 29.9% to $101.7 million. However, as the premium plan is designed to recover losses on a retrospective basis, reductions in premium are welcomed, Mr. King said.
OIL suffered only two losses in 1996, for which a combined $5.5 million loss reserve has been established.
The lower premium level led to a 23% decrease in net income to $39.7 million.
During the year, the company added one client, taking the total to 45.
The most significant change at OIL over the past year has been the increase of the maximum annual aggregate limit to $450 million from $337.5 million. The increase reflects the need for higher limits due to the growth in formations of large joint ventures, Mr. King said. The maximum per-occurrence limit remains $225 million.
Oil Casualty Insurance Ltd.'s gross premiums edged up 1.4% to $42.2 million in 1996. Net income fell 17.6% to $16.8 million from $20.4 million in 1995. Losses and loss expenses declined 62% to $5.8 million in 1996.
During the year, the company put on six new members, while one company left and several members merged, so the number of members edged up to 66 from 64 in 1995.
In 1996, OCIL increased the limits to customers that pay flat premiums to $100 million from $75 million. Customers that pay on a retrospective basis already can buy up to $100 million excess of $50 million.
The change, along with the soft liability market, led to an increase in the average attachment point of members, Mr. King said.
D&O limits are $50 million excess of $25 million.
TOPS Insurance Ltd.
TOPS Insurance Ltd. had another static year in 1996, as there were no major offshore property losses.
The affiliate of OIL and OCIL writes total loss coverage for 16 member companies with offshore production platforms.
The coverage is designed to cover losses similar to the Piper Alpha loss in the North Sea in 1988. It offers $70 million in limits.
Gross premiums fell 42% to $8 million in 1996 from $14 million in 1995, because of a reduction in limits at TOPS in 1996 and then an increase in limits at OIL, said Mr. King.
Zurich Global Energy Ltd.
The latest addition to the energy insurance market in Bermuda is Zurich Global Energy Ltd., a unit of Zurich Insurance Group.
The Bermuda office, which set up last year, is one of seven underwriting offices the Zurich energy business unit has worldwide.
Zurich Global Energy offers $75 million in limits excess of $25 million for liability risks and $100 million excess of primary policies for property risks, said Cathy Duffy, senior vp.
Zurich Global Energy will follow the forms of other insurers in Bermuda, she said. "We are trying to complement the market rather than come up with another form that people will have to learn," Ms. Duffy said.
The insurer offers multi-year programs and blended programs as well as traditional coverages.