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'EXTREMELY THIN' PRICING HAS INSURERS STARVING

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Insurers have seen the market confronting them this midyear renewal season before, but that doesn't mean they like it any better than they did a year-or two years, or three years-ago.

Commercial property and liability rates continue to decline, and even property catastrophe rates are down despite the fact that hurricane season has begun, insurers note.

Workers compensation remains particularly competitive, especially in California, they add.

While that's good news for risk managers, insurers are under the gun to find new ways to compete and differentiate themselves from their competitors.

Some insurers see a silver lining in the cloud known as the Year 2000 problem. Others are looking for growth in new market staples, such as employment liability insurance, as part of their salvation.

But all agree, however, that the current market isn't one they like to see.

"Pricing continues to be extremely thin for all lines of liability. I think it's safe to say that pricing today is equal to or thinner than it was in 1983 and 1984," said David McDonald, chief underwriting officer for the Royal Insurance Group in Charlotte, N.C.

"As long as the stock market continues to perform, surplus continues to be generated and we're not going to see a market adjustment. Having said that, I do believe there will be an adjustment, I just don't know when or why," said Royal's Mr. McDonald.

"It's ugly out there," summed up Dennis Busti, president of Reliance National Insurance Co. in New York.

"If anything, it's worse" than a year ago, he said.

Mr. Busti said the property/casualty market is so competitive that poor loss experience is no longer even a rationale for some underwriters to hold the line on rates.

He said he heard of one company with a large umbrella policy that got a one-third reduction in rates by a competitor, even though the company had poor loss experience.

Such a dramatic reduction is an exception, though, with typical rate declines for commercial prop-erty/casualty lines more in the range of 5% to 15% below last summer's renewal period, he said.

In addition to lower pricing, Tom Swensen, vp-underwriting and product services for Wausau Insurance Cos. in Wausau, Wis., also sees insurers facing a challenge from buyers to boost service or improve terms and conditions.

"Everyone's expecting reductions, but at the same time they want us to add a little more fluff to the coverage. It's gotten to the point where policyholders have squeezed as much as they can."

To continue to compete, he said, "We're concerned with what new ideas can come out to pique their interest, and some of it relates to service enhancements, like online access to the insurance company.

"The last thing we can do to reduce costs is to see what can be done to control loss dollars," Mr. Swensen said. This can include getting policyholders more involved in claims processing, such as through online access to claim files, and giving them more loss prevention services.

"This costs more money for us, so it becomes a tough situation. In order to remain competitive and maintain our existing book of business, that's what we have to do," he said.

Midyear renewals are being completed later in the season than in the past, some insurers say.

"It seems hard to put things to bed these days," said Paul Krump, senior vp and managing director of Chubb & Son Inc. in Warren, N.J. Part of the delay, he said, is due to brokers waiting until the end of renewals before finalizing a deal, in the hope that another insurer will come up with a better price or broader coverage.

That level of competition is evident throughout the marketplace. General liability business remains soft, while specialty casualty coverages are even softer, insurers say.

"Prices continue to go down in general liability. It's a systematic decline, and its intensity is the greatest it's ever been," said Glenn Anderson, president of United States Fidelity & Guaranty Insurance Co.'s commercial insurance group in Baltimore.

The general liability market is softer than it was a year ago, though rates have not experienced double-digit drops, said Royal's Mr. McDonald.

On the other hand, Wausau's Mr. Swensen said his company's general liability rates are "not seeing real significant reductions. It's comparable to what we saw Jan. 1."

Several underwriters noted that specialized liability coverages are under pressure.

Directors and officers liability rates, for example, are declining, said John Kearney, chief underwriting officer for Executive Risk Group in Simsbury, Conn. "It's just a matter of degree if it's single digits or double digits in certain lines or geographic regions. Everyone seems to be asking for rate relief.

"The marketplace is incredibly competitive. We have not gone over the cliff with bizarre or irrational acts on a daily basis. But they happen more frequently than six months ago," Mr. Kearney said.

"Professional liability is also very competitive, along with municipal liability," said USF&G's Mr. Anderson.

"Surety pricing is fairly competitive, as is bankers, professional, D&O-they're all highly competitive and sought-after business," he said.

Property rates are also soft at midyear, though the degree of rate declines varies by location and underwriter.

Commercial property rates, including those for highly protected risks, are "just like the liability side. It's more of the same," said Royal's Mr. McDonald.

Michael L. Downs, senior vp and chief operating officer-special risks division of Hartford Steam Boiler Inspection & Insurance Co. of Hartford, Conn., said, "two things are happening in the commercial area. In the moderate size market, there is tremendous competition. For small commercial accounts, there is a tremendous amount of product redesign going on," he said.

Commercial property rates are declining at midyear, though it is a "more modest decline" than a year ago, noted Mr. Anderson.

Wausau's Mr. Swensen said he is seeing reductions in commercial property rates but "not as significant as last year. It really is dependent on the individual risk. It also depends on geographic location. The coastal areas are less competitive. The Midwest is making up for lost time; we've seen that in the last year to two; carriers that before were more heavily involved in coastal areas shifted gears and went looking for other areas where they might write some initial business."

The highly protected risk market is facing the same challenges as the general property market.

"It is a very competitive market. Historically, our competitors have been in HPR, but most of our competition now is coming from foreign insurers, not HPR," said Kevin Lavin, vp and director of operations for Park Ridge, Ill.-based Protection Mutual Insurance Co. "They are attempting to acquire market share in North America right now. What they offer is significant capacity. Our customers desire and have confidence in our services, which are in engineering. This is something foreign competitors do not provide."

Esther Sprano, vp and chief marketing officer for Arkwright Mutual Insurance Co. in Waltham, Mass., said, "What I found is that the HPR rates have pretty much stayed very steady." She said there was no particular variation by geography.

"In terms of pricing or rating,

it's fairly difficult all over," said Roland J. Bonitati, senior vp-marketing for Allendale Mutual Insurance Co. of Johnston, R.I. Mr. Bonitati said that in some cases, HPR rates have declined 10% to 20% from those of a year ago. He added that, in general, HPR rates for global accounts are softer than those of smaller companies.

Cat rates, while firmer in recent years than regular property coverage, also are down at midyear.

Many insurers are asking "too low a price and too low a deductible," for flood and earthquake coverage, said Chubb's Mr. Krump. Companies are "giving away coverage way too cheaply to be prudent." They do this, he said, to retain market share, "but it will come back and bite them hard."

"There is still a general concern over coastal properties and keeping the price level reasonably acceptable. Pricing for commercial earthquake has fallen 40% over the last year or so," said USF&G's Mr. Anderson.

"As far as the catastrophe market goes, it is softening somewhat, but not anywhere near the extent of non-catastrophe. California earthquake pricing is declining," said Protection Mutual's Mr. Lavin. "In the kinds of accounts we're in, geography only comes into play in catastrophe exposures. The only thing that could affect coverage-because we are a natural catastrophe-driven business-would be a hurricane or an earthquake," he said.

Conditions in the workers compensation insurance market are also less than ideal for insurers, which often have a love-hate relationship with the heavily regulated line.

"Premium volumes are going down as a result of positive workers comp results over the last three to four years," said Wausau's Mr. Swensen. "States are looking at it, and they're basically saying that rates have produced very positive results for you, therefore it's time to give some rate relief to policyholders," he said. At the same time, new companies are entering the line. "The combination of rate reduction and competitive pressures is causing premium volume for most of the old-time workers compensation (underwriters) to shrink," Mr. Swensen said.

Workers comp "is in the greatest degree of free fall in the marketplace. My fear is that competition is overstating the degree of benefit improvement in loss cost structure of the system. Workers comp is deteriorating," said USF&G's Mr. Anderson.

"In California, the main event is workers comp. It's an absolute disaster. My perspective on workers comp, beyond California, is that price wars have spread like wildfire state by state. But California is the worst because of some structural changes several years ago," he said.

Meanwhile, looming now, as it looms every year, is one of the more loss-prone seasons for insurers.

"Obviously, underwriters are focused on the upcoming hurricane season. I do believe the market is capitalized to such a degree that it would take a significantly severe occurrence to change conditions in the marketplace," said Allendale's Mr. Bonitati.

Hurricanes are not the only natural peril worrying underwriters, either, noted Arkwright's Ms. Sprano. She said the insurer considers "flood risk as the big emergency peril of today and the next decade because of global warming and demand on the environment." She noted that building roads, levees and other structures increases flood exposure. Arkwright is building a computerized flood model to help the insurer better assess these issues, she said.

Man-made exposures also are on insurers' minds. The emergence of business interruption exposures because of changes in the supply chain also is creating a challenge for insurers and risk managers, she said. These exposures include "just-in-time" delivery, where companies don't keep large inventories on hand and depend on goods being delivered at exactly the right moment, and situations where customers have totally eliminated an internal function and contracted it out to a supplier, she said. Arkwright has experts in individual industries who help risk managers assess their specific exposure areas.

But the biggest man-made exposure will have to be confronted within the next 30 months. Many computer systems in the year 2000, particularly systems and computers regulated with safety devices, present an emerging liability, said Hartford Steam Boiler's Mr. Downs.

Chubb's Mr. Krump believes the Year 2000 problem is a large looming exposure from both business interruption and liability standpoints if a company's computer system or other devices that rely on computer chips fail.

Chubb is looking into creating a new product that directly deals with the issue, Mr. Krump said. It is assessing "all the underwriting issues and how can we get our arms around them and respond in a reasonable fashion," he said.

Executive Risk's Mr. Kearney agreed that the Year 2000 problem needs to be examined. A company with a Year 2000 problem might try to recover under its D&O policy, he said. As a result, Executive Risk is assessing applicants' Year 2000 loss potential when underwriting.

Reliance National's Mr. Busti also sees Year 2000 concerns as a potential opportunity for underwriters. In fact, Reliance National is introducing a new product with J&H Marsh & McLennan Inc. to cover liability and business interruption for companies with losses associated with the Year 2000 computer problem.

Earlier this year, the Minet Group, now part of Aon Group Inc., and AIG Global Risks launched its Millennium Insurance Policy with limits up to $100 million. The custom-made policy protects against disrupted business or third-party lawsuits relating to computer system failure (BI, April 7).

Executive Risk's Mr. Kearney sees financial deregulation creating new entities-such as combinations of banks and securities brokers into new and larger financial services companies-that will have new coverage needs.

These newly merged companies will want a single policy that covers the different aspects of their operation. "It's a diversified financial services organization that does everything from A to Z. The type of product that responds to that does not exist," he said. The companies want to have one product that will cover the different aspects of their operation where today they are covered by different policies. To do this, underwriters may need to create custom policies, he said.

Insurers also are rethinking risk financing challenges during this renewal season.

Hartford Steam Boiler's Mr. Downs said the biggest risk-financing challenge is "in the commoditization of insurance."

"There is so much capacity in the marketplace today. There's new capacity that needs premium growth to generate investment returns. There is a trend toward integrated risk products; a slow trend, because market rates are so low," he said.

Allendale's Mr. Bonitati said he sees a trend toward quota-share programs, which allow the insurer to meet customer needs and capacity "in a more efficient manner."

He said he has also received several requests to provide guaranteed cost coverage over longer contract periods. Mr. Bonitati said this trend has emerged only during the past few months, which he believes may mean people perceive the market to be close to bottom.

"There's not too many of those because of the softness of the market, but there is a trend toward multiyear insurance programs to reduce remarketing costs. Insurance is being looked at by the financial section, and the insurance market has to adapt to that," said Hartford Steam Boiler's Mr. Downs.

Arkwright's Ms. Sprano said risk managers are interested in multiline aggregate programs. She added, however, that being interested in a concept doesn't necessarily mean they are willing to buy the product.

"It's more like window-shopping than buying," she said.

USF&G's Mr. Anderson said other new products and services include a variety of special types of coverage, such as Internet liability insurance and electronic commerce insurance.

Employment liability insurance increasingly is sparking underwriters'-and buyers'-interest.

Mr. Kearney said Executive Risk has seen increasing demand for employment practices liability insurance policies. "We're doing a lot of EPL business, getting a lot of requests from existing clients as well as new relationships."

For EPL coverage, rates are steady but inconsistent among underwriters, he said. That is because the law and loss experience in the field are relatively new, and there is not enough experience to create a uniform pricing structure, he explained.

"There is ongoing growth in EPLI; it's clearly an emerging field," said Mr. Anderson.

"There's the issue of employment practices liability insurance. There's a lot of activity out there. The unknown is again what the legislation means. There's not a lot of court-tested cases involving, for instance, the Americans with Disabilities Act," noted Wausau's Mr. Swensen.

There is also demand from buyers for "the whole notion of safety and loss prevention products. It's what I call upstream intervention," said Karl Jacobson, senior vp and general manager-loss prevention department for Liberty Mutual Insurance Co. in Boston.

"They want help measuring the extent of hazard and control," he said. Buyers' position is: "*'Don't tell us how many accidents we've had, tell us about hazard prevention.'*"

"We're also helping them rally the workforce in participating in control of exposure through self-directed work groups and teams. They want help training and developing these teams as they occur before somebody gets hurt. There's always ongoing training efforts," Mr. Jacobsen said.