U.S. marine insurers are hoping that risk managers won't decide to use a chaotic marketplace as leverage to demand lower insurance rates.

A "short-term concern is that risk managers will use the combination of the extremely soft market, brokers' anxiety and market disruption to further reduce their costs," said Richard J. Decker, vp and product line officer for CIGNA Property & Casualty's ocean marine unit in Philadelphia.

Such a move "would be shortsighted, because to the extent actions like that weaken the business, we will not be able to provide the very necessary services as the margins disappear," Mr. Decker said during a presentation at the Houston Marine Insurance Seminar earlier this month.

Risk managers are buying coverage from a U.S. market marked by intermediaries consolidating and cutthroat pricing, Mr. Decker remarked, and some worry risk managers may take advantage of eager brokers and insurers.

Policyholders, meanwhile, are watching insured values rise as they scramble to add new equipment to keep up with the booming demand for oil and gas.

Offshore drillers and oil service companies are seeing good times for a change, said C. Russell Luigs, president and chief operating officer of Global Marine Inc. in Houston.

Mr. Luigs, who made a separate presentation at the Houston seminar, said the demand for hydrocarbon products is "beyond anything we've ever seen." Excluding the former Soviet Union, consumption of those products-oil, gas and natural gas liquids-is up 30% over the past 10 years, he said. "And that is a monumental number. Thirty percent growth is a tremendous growth rate."

While increasing demand in the past could be met by "opening valves," tapping existing stores of hydrocarbons will not meet future needs, Mr. Luigs said. New drilling will have to produce additional sources of petroleum.

The boom has left energy companies hurting for equipment that is in short supply. Building or replacing it means insured values are rising, Mr. Luigs pointed out.

Only 48 rigs are idle, he said, compared with 340 on the sidelines in 1986. Of the 48, only four are ready for service, and those aren't beauties, Mr. Luigs said. Another 31 are being prepared for service, and the rest aren't usable.

He said rising revenues are enabling oil and gas companies to buy needed equipment and pay the additional premiums for the higher insured values. "The amount of equipment to be insured is going up, and the ability to pay the premium is going up correspondingly," Mr. Luigs said.

To illustrate the increase in values at risk, a "standard, relatively small," 250-foot cantilevered jack-up rig commonly used in the Gulf of Mexico cost $40 million to build in 1986 but now costs about $75 million to build, he said.

While insured risks may be rising, energy companies generally are finding coverage is plentiful and reasonably priced in a market awash with surplus. Marine-related businesses are finding the same.

"There is so much surplus that must be put to work that some companies are writing business for the sake of cash flow, or simply riding the market down because they don't know what else to do," said CIGNA's Mr. Decker. "In the long run, we will be doing our customers no favors if we commit mass suicide as an industry."

Capacity is so plentiful, he said, that for some risks it is essentially unlimited. For example, putting together $1 billion in coverage for cargo risks is easily done, Mr. Decker said.

Marine rates are falling for no good reason, he noted. If a company has a loss, "the rate doesn't go up; it doesn't even stay the same. One of us comes along and assumes the account has been debugged and underbids on it."

Despite such competitive underwriting, U.S. marine insurers are making money, with combined ratios in the low 90s for the past few years. "It has been very, very profitable for us," Mr. Decker said.

The consolidation of brokers, which has affected risk managers in many more areas than marine exposures, is an indication that those brokers "recognized that the structure of their business could no longer be supported by the diminishing margins, and they took dramatic, sometimes defensive steps to position themselves for the future," he said.

Despite a smaller pool of brokers, risk managers still may place marine business through more than one broker in the shrinking pool, giving themselves some leverage, Mr. Decker suggested. "What was two brokers is now in many cases one. We can expect several clients to maintain their corporate risk management strategy and bring in another broker to rebalance their buying habits."

Mr. Decker said underwriters are obligated to look out for their clients' needs with regard to the changing distribution system.

"I've heard many underwriters and in fact some second-tier producers express reservations about how large a share of their business is now with one or two producers. They worry that these megabrokers are developing leverage which could be used to force decisions which might not be in the clients' best long-term interests."

Those large brokers could threaten insurers with "do it our way or we will move all of our business," a stance that could damage relationships between the two, Mr. Decker said.

Those underwriter/producer relationships cannot be allowed to deteriorate, he urged. "We as underwriters must be sure that we provide the services and financial products our clients need and make sure that both brokers and clients understand the value that we bring."

Like their insurers, many energy industry policyholders are making money. As they expand, so will their coverage needs.

An indication of their expansion can be seen in the rise in exploration and production expenditures. That spending has risen to about $83 billion this year from about $45 billion in 1990, according to figures Mr. Luigs quoted from Salomon Bros. research.

The rise in spending on exploration and production is an "enormous increase not related to oil price," he stressed.

Indeed, that increase comes as oil prices have remained steady. Except for three short-lived spikes, the cost has hovered around $19 per barrel since 1990.

As energy companies expand to meet demand, underwriters must recognize their particular needs

and respond with products and services to meet those demands, said Mr. Decker of CIGNA.

"It's been our experience that the large, sophisticated clients with professional risk managers have complex risk management programs where they retain more risk," he said.

Those clients often use captives, large deductibles and other self-insurance approaches to cover their exposures, he added. "In many of these complex programs, marine insurance may not even be considered a separate risk. It may simply be one of a number of risks which are bundled together in the same program. Effectively managing the needs of a client like this will include the ability to unbundle services like claims, loss control, salvage and recovery."

Mr. Decker said risk managers' changing buying habits are having an effect on the reinsurance market.

"Our clients, especially the larger clients, are no longer transferring as much of their risk to us. Especially predictable, low-level exposures," he explained. "Also, we the underwriters are retaining more of our own risk and reinsuring less."

That leaves the reinsurance markets with diminishing revenues, Mr. Decker noted. "Having amassed

capacity, they are looking for ways to employ it and grow their business. We are seeing the result of their creative survival instincts manifest itself in several different ways."

Reinsurers are supporting managing general agencies with their capacity, he pointed out. "Some have looked to directly access the client through active captive management

and reinsurance of the captive. Other reinsurers have entered the direct world through financial product schemes and finite risk."

New clients for U.S. marine insurers will likely come from growing, smaller-sized shippers, Mr. Decker said.

"It's important to recognize that we must use our expertise to access not only the largest clients but also those that would be considered midsized or smaller who are producing the majority of the available new business," he said.

Because it can be costly to uncover and serve that market, insurers can form strategic alliances like the ones CIGNA is developing, he said. Such alliances avoid some of the costs involved in seeking out new business.

CIGNA formed INAMAR Insurance Underwriting Agency Inc. last year "in order to allow ourselves the flexibility to change with the markets, make strategic alliances and broaden our distribution sources," Mr. Decker explained.

On Jan. 1, INAMAR allied with USF&G Corp. in a partnership that allows CIGNA "access to their distribution system and their clients with little or no cost, and they get to offer their clients ocean marine cargo insurance and continue to fulfill all of their clients' needs," he said.

Just because the U.S. marine business is like all business, "very Darwinian-survival-of-the-fittest," doesn't mean insurers have to kill off one another in the process, Mr. Decker remarked. "In many cases we have the better options of educating the market and of forming alliances that deliver value."