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Lengthy annual renewal negotiations for specialty risks are becoming a thing of the past for some risk managers.
Instead of buying numerous policies with different limits every year, more risk managers are buying multiyear, multiline, single-aggregate policies from a few insurers that increasingly are willing to offer the more flexible coverages.
Several policyholders, including General Electric Co. and First Data Corp., are taking advantage of that flexibility to cover their specialty risks.
Unlike earlier versions, the new breed of integrated policies is less likely to disappear after a market turn because the policies are offered by a few large insurers not reliant on reinsurance, according to brokers and insurers.
By using single policies to provide long-term coverage for several types of risks, policyholders are able to dispense with time-consuming annual renewals, achieve significant cost savings and make more efficient use of insurers' capacity, said Michael P. Hammond, managing director of Sedgwick Global, a unit of broker Sedgwick Group P.L.C. in New York.
"These deals are very attractive because the frictional costs of doing business are significantly reduced," he said.
Before the combined policies were introduced, risk managers may have had to rely on 10 to 30 insurers to cover all of their risks, Mr. Hammond said.
"Now they can deal with two or three," he said.
And more risk managers are choosing this route, Mr. Hammond said. "These deals are getting done, and they are getting done considerably more frequently than they were 12 months ago," he said.
Part of the impetus behind the increase in integrated policies is insurers' willingness to cover a wider variety of risks than when they started writing large-capacity multiyear, multiline, combined-aggregate programs two to three years ago, Mr. Hammond said.
Rather than simply writing mainstream property and casualty business under the policies, insurers now also will consider specialty risks, such as directors and officers liability, political risk and even some not traditionally covered by insurance, such as exchange rate risks, he said.
Insurers are more willing to be flexible with the deals and write specialty risks under the new policies, agreed Robert J. Cooney, president and chief operating officer of X.L. Insurance Co. Ltd. in Bermuda.
X.L. set up a facility called Risk Solutions with CIGNA Property & Casualty Insurance Co. in 1996 to offer large-limit, multiyear, combined-aggregate policies to cover property and casualty risks. When it was launched, Risk Solutions provided up to $400 million in annual limits excess of a large self-insured retention, and it only covered mainstream risks.
Now, Risk Solutions provides $600 million in overall coverage, and it can cover specialty risks. The specialty
risks carry a sublimit of $60 million, Mr. Cooney said. And the minimum attachment point was reduced to $1 million.
Policyholders welcomed the expansion, he said. "Of our eight or nine Risk Solutions clients, one or two had three or four coverages, and the rest have five, six or even seven or eight coverages," Mr. Cooney said.
Of the specialty risks, the most popular to be covered are D&O, employment practices liability, crime and
fiduciary liability, he said.
Risk Solutions has about a dozen more clients that have single lines covered under the program but intend to include other coverages as they are renewed, Mr. Cooney said.
Other insurers that are offering the new combined coverages also are providing expansive coverage, said Robert Mathis, vp of underwriting in the integrated products department of Zurich-American Insurance Group in New York.
In June 1996, Zurich started offering $85 million in annual limits for multiline, combined-aggregate coverages for policy terms of up to five years, he said. The minimum attachment point varies by industry, but some of the eight Zurich policies written have attached below $1 million, Mr. Mathis said.
The policies typically are based on excess liability coverage with specialty coverage added.
Coverage can include property, D&O, professional liability, employment practices liability and environmental coverages, he said. "Basically, they can cover any line which Zurich operations write," Mr. Mathis said.
Most of the integrated policies Zurich writes only involve a handful of other insurers also offering high net capacity, he said.
Some clients have only used Zurich's capacity, but some clients that are trying to put together integrated programs up to $1 billion are seeking to utilize most of the available integrated capacity in the market, Mr. Mathis said.
One of the risks of the programs is that the combined-aggregate limit could be exceeded if two or more lines of coverage suffered large losses within a single year.
However, this problem usually is overcome by including a reinstatement option in the policy, said Anthony Gagliardi, a senior client executive in the financial and professional department of J&H Marsh & McLennan Inc. The option allows a policyholder that has suffered a loss that exceeds the limits to buy an additional limit.
None of J&H/M&M's clients has had a problem with exceeding the annual aggregate yet. "And we don't anticipate it," he said.
One of the main attractions of the integrated policies is they use available capacity to cover several lines unlikely to suffer large losses in a single year, he said.
Policyholders that might suffer losses that would exceed the combined aggregate and a reinstatement might find it difficult to obtain the coverage, said Mr. Hammond of Sedgwick.
"And if you have two limit losses over a three-year period, you've got more problems in your organization than worrying about your third year's insurance," he said.
Policyholders likely will have less reason to worry about the new integrated capacity drying up if the insurance market becomes less competitive, said Mr. Hammond.
While the integrated risk market that started in the early 1980s did disappear when the market hardened, that was mainly due to the absence of
reinsurance, he said. The new products largely do not rely on reinsurance.
Also, risk managers now take a broader view of risks, and integrated policies are a much more efficient way to cover the broad spectrum of risks, said Mr. Gagliardi.
Multiyear combined-aggregate pol-icies likely will take hold and become popular with many risk managers, said Michael Eremchuk, risk manager at First Data Corp. in Atlanta.
"As more insureds try to gain control of their programs and to maximize efficiencies, they will look beyond the traditional annual time frames of insurance policies," he said.
If insurers stop offering the coverages, policyholders will turn to the alternative market or reinsurers to buy the coverage, Mr. Eremchuk said.
"I think the insurers will continue to offer the coverage, but if they don't, then we may have to go to captives or reinsurers. Whatever happens, once insureds get a taste of the concept, it will be here to stay," he said.
First Data set up its multiyear, multiline, single-aggregate coverage in March. Mr. Eremchuk opted for the coverage after seeing how well it worked for his previous company, NationsBank Corp. in Charlotte, N.C.
The coverage was placed by J&H/M&M and is split into three layers, with CNA Insurance Cos. covering the primary layer and Chubb Corp. and Gulf Insurance, a unit of The Travelers Group, participating. It covers D&O, fiduciary liability and crime exposures, Mr. Eremchuk said.
Previously, First Data had three separate policies with varying limits. The combined policy provides one limit for D&O and crime coverage and a sublimit for fiduciary liability.
Mr. Eremchuk would not reveal the limits under the policy, but under the combined coverage the D&O limit increased by 87.5%; the crime limit increased by 50%; and the fiduciary liability limit increased by 100%.
First Data bought additional side A D&O coverage, which covers the individual liability of directors and officers, under a separate policy. The company also has $25 million of side B coverage in the multiline policy that attaches as excess coverage for the side A policy, Mr. Eremchuk said.
The $1 million deductible was an increase on the prior fiduciary liability deductible but the same as the previous deductible under the old D&O and crime policies, he said.
The policy has a three-year term and contains a reinstatement option.
One of the main benefits of the combined program is the reduction in premium, he said. He estimates that on a discounted basis, First Data will save between 30% and 40% on the previous three premiums it paid.
And the combined coverage is a more efficient way to buy coverage for exposures that suffer losses infrequently, Mr. Eremchuk said.
"It gives us the kinds of limits we need for serious exposures without forcing us to buy separate limits," he said.
General Electric Co. is another policyholder that sees an attraction in integrated coverage.
GE bought a five-year, non-cancelable multiline, single-aggregate policy for financial coverages last June, said Edmund B. Greene, deputy treasurer-insurance at the conglomerate in Fairfield, Conn.
The policy was placed by Aon Group Inc. and is led by National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of American International Group Inc. It covers D&O, E&O, employment practices liability, fiduciary liability and fidelity, Mr. Greene said. Previously, GE had used about 30 individual policies to cover the different exposures and different units, and some of those limits were as low as $5 million.
The combined policy provides $525 million in limits and has a $25 million deductible. Additional coverage is bought for side A D&O coverage.
The main benefits of the program are that it gives higher limits and broader coverage for a reasonable price, Mr. Greene said. It also cuts out a lot of administrative work, as there is no need to renew the coverage annually.
However, the combined coverage is best suited to GE's financial lines, which traditionally have had infrequent claims, he said.
"I'm on both sides of the fence when it comes to multiline policies. For a single-line company they probably work, but we have to carry separate coverages for other risks," Mr. Greene said.
For example, GE has a separate $1.3 billion program for aviation coverage, he said.
"We have such a big aviation risk, and two losses could happen in one year, so I'd be nervous about putting aviation coverage into a single-aggregate policy," Mr. Greene said.