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SANTA MONICA, Calif.-The longest-ever soft market is increasing competition for the alternative risk financing market, though that may change if the conventional market hardens.
"The alternative market is a growing sector within the commercial lines market, and depending upon how you define the programs that fit within the market, it comprises somewhere between 40% and 50% of the commercial lines market," said John Kessock Jr. He is president of Mutual Risk Management Ltd. and chairman of Philadelphia-based Commonwealth Risk, which markets alternative insurance products.
Buyers still seek to retain a "significant" portion of the frequent, small and predictable risks and transfer the rare, unpredictable risks to the insurers or reinsurers, in return for underwriting profit and investment earnings through a risk-sharing in the program, he said as moderator of a panel at Business Insurance's Fifth Annual Workers Compensation Conference.
Historically, the advantages of alternative market programs have included stable pricing, access to investment income, reduction in transaction costs, and limited exposure to extreme losses through reinsurance. "The key word is control: You control your own destiny," especially with control of the claims processes, Mr. Kessock said.
Alternative markets can include anything in which a participant can retain risk, but they usually include large-deductible workers compensation programs, captives, rent-a-captives, and risk retention and purchasing groups.
"The alternative market today is still driven by workers compensation," Mr. Kessock said.
Insurance research firm Conning & Co. estimates that premium in the alternative market is 44% workers comp, 35% medical malpractice and 22% other liability coverages.
"One adage. . .that is being tested today is that once you enter an alternative market program, you never leave the program," Mr. Kessock said.
However, self-insured groups are buying guaranteed-cost policies, and traditional insurers are offering corporations with captives policies that are priced $300,000 to $400,000 less than their expected losses.
"It's a crazy time; the alternative market is in a state of flux," he said. It's impacted by the soft market, new technology, the Internet, and securitization products proposed by Wall Street, he said.
"It continues to grow but not for the same reasons it grew in the past," he said.
Traditional companies are reducing their reinsurance treaties on their core books of business and taking more risk when the rates are going down, "which is madness." At the same time, reinsurers are buying property/casualty companies and competing in the writing of first-dollar coverage.
Yet, "workers comp rates continue to decline all across the country," with a 10% average drop, even though insurers are losing money on medical costs, he said.
Competition is heating up because traditional insurers are setting up rent-a-captives in Bermuda to write large individual accounts, though there is no market for that.
Meanwhile, Commonwealth Risk, which has an underutilized rent-a-captive program for large risks, is going after small program business-for companies with $25,000 to $50,000 in annual premium-and offering all types of coverage it then packages for reinsurers, he said. "We've got a criss-cross here."
"Common sense will tell you a risk-taker today can't make any money in this business. You've got to be nuts.
"I honestly believe there is going to be a turn in the market," which may come next year or later, Mr. Kessock predicted.
Five factors prompting this prediction include: stagnant workers comp results and commercial lines pricing, insurer pressure on Wall Street analysts to ease off on their interest in double-digit growth, more mergers and acquisitions, and shareholder and shareholder demand for returns.
The panel he moderated also included two presentations on success programs.
Arthur E. Engel, chairman and chief executive officer of Southwest Marine Inc. in San Diego, described a 16-year program protecting the ship repair company from job-related risks faced by its 2,000 to 2,500 employees. Work-related claims are mainly adjudicated under the Longshore and Harbor Workers' Compensation Act, which provides much richer benefits than California's workers comp program, he said.
For about the past eight years, the company has had a complex retrospectively rated program, which includes a $500,000 retention and reinsurance coverage. It previously included a rent-a-captive, a company spokeswoman said.
Southwest Marine's focus on safety and good claims administration are key reasons for its success, Mr. Engel said.
In the early years, its risk financing program reduced rates 30% and returned 50% of premium, compared with the company's previous coverage, written through a state fund. In the past 10 years, the total premium paid under the Harbor Workers Act has been more than $75 million, but the company's rates are less than half the going rate prior to open rating in California, he said. He believes the company's rates are still 25% below what open rating quotes would be.
Despite the soft market, a Bermuda-based rent-a-captive program continues to be a viable source of workers comp coverage for On Assignment Inc., one of the largest U.S. professional employer organizations with about 3,500 scientific employees, said Eric P. Radke, director of risk management.
"Our overwhelming expense is payroll, at about $85 million, and our standard comp premium is approximately $900,000," he said. He said the program, which includes a $250,000 retention, helps the Calabasas, Calif.-based company meet its priorities, which are, in order: service, control, cost and reasonable certainty in the future of its programs.
With this program, the company is able to demand good service, have very good flexibility and control and dampen market swings while gaining some investment and tax advantages, Mr. Radke said.