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INSURERS ADD SERVICE TO THEIR LOW PRICES

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Risk managers are looking for bargains from property/casual-ty insurers, and those with midyear renewals are getting them.

Rates for nearly all casualty lines, including workers compensation and specialized liability coverages, remain competitive, insurers report. Property insurance rates also are lower, driven in part by an absence of large catastrophes.

Risk managers increasingly are looking not only for low rates but also expanded coverage and enhanced services, and many insurance companies are scrambling to provide them.

Insurers say buyers at midyear also are looking for new risk financing options, such as multiyear and multiline programs, and also assistance with tough exposures, including Year 2000 computer problems.

For most insurers, the midyear renewals season remain the second-busiest of the year. For most, about a quarter of their accounts renew June 30 or July 1, though some companies report exceptions to this rule.

Dennis Kane, president-special risks facilities for CIGNA Property & Casualty in Philadelphia, said about 60% of his division's book of business renews during May, June and July.

CNA Insurance Cos., by contrast, has seen June-July renewals slip in activity and become its third-most important season. Larry Rand, vp and chief underwriting officer-commercial insurance for CNA in Chicago, said that for the insurer's largest clients, April has now become the renewal date of choice, elbowing out year-end and midyear renewals.

No matter what percentage of their books of business are renewing at midyear, insurers unanimously report price reductions across the board, the degree of which varies only by line of business. Only problem accounts are registering any rate increases in most lines, insurers say.

Tom Swensen, vp-underwriting and product services for the Wausau Insurance Cos. in Wausau, Wis., said the commercial property/casualty insurance market has now gone "even beyond" the soft conditions of the early 1980s to become the most competitive he's seen in 25 years.

"It's very competitive. We don't see much end in sight, because most companies are reporting very good earnings," said Esther Sprano, vp and chief marketing officer for Waltham, Mass.-based Arkwright Mutual Insurance Co.

"We are seeing particular pressure from some of the newer capacity in the market in the tough classes, where there is high premium volume and, consequently, higher exposure, because the aim by those companies is toward premium growth," said Roger Gillett, senior vp-business development for ACE Insurance Co. Ltd. in Hamilton, Bermuda.

The same pressure holds true in property, he said. "The cat-exposed business is under greater pressure because that is where the greater premium volume is," Mr. Gillett said.

The property market "continues to be very soft; we're describing it as a demand market. Our major emphasis is to differentiate our product and to provide engineering services," said Armand Colaninni, vp and director of operations in Dallas for Protection Mutual Insurance Co.

"The market is very sloppy, but we don't use that as an excuse. This is the market. The only thing we can do is keep looking for pockets of opportunity. Whether it's been luck or just good strategic planning and being a little

agile, we have been able to find tremendous pockets of opportunity," said Robert Steinberg, president and chief operating officer of Reliance Group Holdings Inc. in New York.

"Competition is fierce with a wide array of markets in various segments we're in. Insurers like us are pressed harder than ever to make critical risk selection and pricing decisions that meet the top- and bottom-line objectives we have every year," said Mike Turner, vp-marketing for Allendale Mutual Insurance Co. in Johnston, R.I.

"Depending on the quality of the risk, (property/casualty) rates are either holding steady or dropping up to 5% from six months ago," said Paul J. Krump, senior vp and managing director of Chubb & Son Inc. in Warren, N.J. "We're still seeing a slide, depending on quality of customer."

On some accounts, brokers are asking for a reduction in rates or expanded coverage, he noted. Chubb is holding the line on rate decreases to anywhere from none to a 5% reduction on package programs, workers compensation, commercial auto, middle-market property/casualty accounts and middle market umbrella liability policies, he said. The larger risk management accounts are experiencing rate reductions of up to 10% across all lines, Mr. Krump said.

"An account that would be getting a rate increase would be having some problems," he added.

Premium reductions vary by class of risk, with clients generally not asking for as much of a reduction at midyear as has been the case in past renewal periods, said ACE's Mr. Gillett. Nevertheless, in most classes at midyear, policyholders are looking for 10% reductions -- and some are getting them, he said.

Not all price reductions appear in strictly dollars-and-cents terms.

"What we are seeing are hidden price reductions. That is underwriters throwing in more or broader coverages for the same or slightly reduced prices, but the net effect is it's a more significant reduction in price with more exposure," pointed out Ward Jungers, CNA's group vp and chief underwriting officer.

"From an underwriting perspective, prices have gotten about as low as they can get. It's a very fragile equation, because so much rests on investment income," said Tom Kaiser, president of international accounts for Zurich-American Insurance Group in Schaumburg, Ill.

On a line-by-line basis, property/casualty insurance rates continue to head south.

Wausau's Mr. Swensen said primary general liability rates have dropped anywhere from 5% to 10% from where they were a year ago, with low-layer excess liability dropping by the same margin.

CNA's Mr. Jungers said the excess liability layers are "a particularly soft segment of the liability market, which is fairly typical for a soft market. The excess tends to be an area where price reductions are more extreme."

Zurich's Mr. Kaiser said high-layer or catastrophe excess liability "continues to be under pressure. If there is a commoditization of this business, it's in that area. That's where the overabundance of capacity shows itself," whereas the primary casualty piece is being driven more by service.

High-hazard liability, however, is "fairly stable," said Mr. Swensen of Wausau.

Specialty liability lines are also feeling considerable pricing pressure, several underwriters say.

"The specialty lines are undergoing a lot more competition because of newcomers in the marketplace," said Zurich's Mr. Kaiser.

"There is a great deal of competition in the municipal liability market, which can be good for the public entity sector in terms of pricing. The extent of the rate deterioration is difficult to measure because of some erratic behavior in the market," said Ron Seymour, senior vp-public entity/alternative markets in the Irvine, Calif., office of Gulf Insurance Group, a New York-based unit of Travelers Corp.

Directors and officers liability is "very soft" on pricing, said CNA's Mr. Jungers. In addition, the D&O line is experiencing a lot of pressure on policy conditions, as well as a continued push for three-year or other multi-year policies to lock in current rates, he said.

"Inevitably, the (loss) experience, which is surely going to deteriorate, will cause some firming in price," said Mr. Jungers, adding, "I would be quite pressed to put a horizon on that, however."

In some cases, plunging rates are discouraging insurers from providing coverage in certain lines, said Mr. Gillett of ACE.

CNA's Mr. Rand said employment practices liability rates keep going down while lawyers find more ways to bring suits.

"It appears the risk is going up and price is going down, and that equation doesn't make us want to play in that market," he said.

The one bright spot on the liability insurance horizon for underwriters could be medical malpractice, said Mr. Jungers.

"There are some signs in the medical malpractice area that the (loss) experience is already starting to put the pressure on company returns. I would say we can expect to see a hardening of that market sooner than later," he said.

Pricing for environmental liability insurance is "stable with a steady decline; prices are going down," said Zurich's Mr. Kaiser.

Surety and bankers bonds rates are generally holding their own, said Reliance's Mr. Steinberg, who said Reliance's surety operations are growing by 10% to 12% a year.

"Those lines are just doing very well. Rates are holding. Maybe there is a little pressure on commission, but rates are holding. This is a very good environment for the surety world because you don't have very many claims," Mr. Steinberg said.

Workers compensation, which had been a bright spot for some underwriters as regulation improved in recent years, is no longer their salvation.

Workers compensation is "the line that we are seeing as the most competitive, through a combination of state reduction in rates or loss costs, combined with company deviations and dividend plans. It's the biggest challenge we see facing our company," said Mr. Swensen of Wausau.

In many states that generated positive results in workers comp in the mid-1990's, insurers are now experiencing their third or fourth double-digit rate or loss cost reduction in a row, but new players continue to enter the marketplace, basing their decisions on the results of five years ago, Mr. Swenson said. "If they're betting on the rates being redundant or excessive, it's not there any more," he said.

The best years may now be behind the workers comp industry, one insurer executive says.

"We have seen several years of substantial improvement in workers comp, a lot of which has been driven not only by state reform but also the ability of the industry and the customers to partner and deliver some of the managed care techniques on the work comp side," said CIGNA's Mr. Kane. "My sense is that the best years are now behind us, and if you look at the social and political pressure pushing back on managed care and HMOs, we are likely to see -- and have already started to see -- some cost increases percolate through the system," he said.

Property rates continue to be battered, regardless of whether the property in question is a highly protected risk.

"There is continued rate pressure on both HPR and non-HPR. The pressure also applies to commercial property with a catastrophe exposure. We view the market right now as being undisciplined," said Protection Mutual's Mr. Colaninni. Property rates are dropping by the high single digits, he said, though the amount of the decline varies by account.

"Within the last six months, it's just gone crazy. Very, very competitive," said Wausau's Mr. Swensen of the HPR market.

Mr. Swensen described an HPR renewal to illustrate his point.

Two companies merged, and both had HPR insured values in excess of $1 billion each. When they merged, they opened up their combined risk to bids, and both incumbent insurers quoted on it. One of the two incumbents offered to write the combined and enlarged account for the expiring price of one of the programs being merged, said Mr. Swenson, who emphasized that the underwriter in question was not Wausau. "It's just cutthroat out there."

Mother Nature is playing a role in the property market's continued softness, pointed out CNA's Mr. Jungers.

"The lack of catastrophes is generally causing the market softness to perpetuate, but not just in cat exposures," he said. Favorable results due to a lack of catastrophes also may prompt some companies to be more competitive in other lines. "Earnings are so strong, it affects all of the business -- property, liability, cat and non-exposed," he said.

There is "not a whole lot of differentiation" between rates for catastrophe-exposed and non-catastrophe-exposed property, said Arkwright's Ms. Sprano. While rates are lower, deductibles seem to be holding for catastrophe-exposed property, she added.

All-risk policies are seeing sharp rate cuts, one insurer says.

For really large all-risk policies that include boiler and machinery and property, rate cuts of 25% to 35% are not unusual from some markets, because capacity is drawn to the large premium accounts without regard for exposure, said Rick Gibbons, senior vp-underwriting and general manager of the energy division at Hartford Steam Boiler Inspection & Insurance Co. in Hartford, Conn.

Meanwhile, buyer interest in relatively new products continues to grow, said several underwriters.

Multiyear insurance policies are becoming increasingly popular, said CNA's Mr. Rand. "In large accounts, we are seeing more and more requests for three-year programs with single deductibles for all lines," he said.

Wausau's Mr. Swensen said that while multiyear catastrophic risk policies have been on the market

for some time, they have become much more popular in recent months, as requests for quotes have shown.

There is also some interest in multiline insurance programs.

"Over the last year and half, our Fortune 500 clients that are interested in combined risk programs discovered that the benefits don't outweigh what they can get through traditional risk transfer programs with the market being so soft. However, there are other clients who have concluded that the change to those programs are worthwhile," said Allendale's Mr. Turner.

CNA's Mr. Jungers said customers are requesting that the insurer add protection for business risks, such as foreign and interest rate fluctuations, to insurance programs.

"Any change in the economic environment that would affect profitability of a business is a target for inclusion in the insurance program," he said. Mr. Jungers cited foreign exchange risk hedging as an example of an area in which interest has picked up in the past six months.

ACE's Mr. Gillett said he is seeing more demand for multiline policies, as well as a broader form of coverage under D&O policies.

In particular, he said, there is increased demand for an ACE product that will cover solely side A risks, which are directors' and officers' personal liability for their actions.

There is increased demand for that as a stand-alone cover due to the potential for such coverage to be eroded by losses under broad-form D&O coverage, which also indemnifies the company for losses incurred by directors' wrongful acts, or by losses under other parts of a multiline policy, he said.

For example, under a multiline policy with a single aggregate limit, a big property loss could erode the side A D&O coverage, leaving individual directors and officers exposed to liability.

"One of the things that's happened over the past 12 months is much more involvement by risk managers in their program design. I think everybody talks about the buyer becoming much more sophisticated -- it's happening just by the involvement we see by risk managers," according to Zurich's Mr. Kaiser.

Risk managers also are showing more concern about their exposure to the rapidly approaching year 2000.

Interest in -- and concern over -- the Year 2000 computer problem has grown considerably in recent months, several underwriters say.

"I don't know if I would call it great urgency. Up until a month or so ago, we were not getting any inquiries from producers or clients about our position on Y2K. In the past few weeks, those questions are starting to come in with a fair amount of frequency," said Mr. Swensen of Wausau.

Risk managers aren't asking for coverage or advice but just want to know what the insurer's position on the matter will be, he said, adding that "we're working on that right now."

"It's definitely creating urgency among risk managers. There's definitely a lot of pressure to do something," said Arkwright's Ms. Sprano. She said the insurer is getting requests for fee-for-service audits for "all business processes to identify Y2K glitches."

CNA's Mr. Jungers said the insurer's large accounts are looking for advice or service in helping identify the amount of risk they have, and that those requests have increased recently.

"I have been surprised by word we have gotten from association meetings that a number of business owners seem to just be awakening to the problem. Some of them really need to wake up and get out of it," said Mr. Rand of CNA.

The Year 2000 liability "is very hard to get your arms around," said Reliance's Mr. Steinberg. "I think a lot of companies like ourselves are doing a lot of work in that area trying to get a better sense of what the Year 2000 liability is." Reliance was among several insurers who worked with J&H Marsh & McLennan Inc. in developing a Year 2000 liability coverage product.

Chubb also is working on products that would respond to Year 2000 computer problems, said Mr. Krump. "We are in the process of informing our brokers about our approach to Y2K. More will be coming out in the next week or two. Underwriters are going to have to start divulging what their strategies are for that."

"Ours is really going to respond to the exposures presented by the individual client," he continued. "It varies by product type as well. The response for Y2K would be different for a package client, which could easily differ from a software manufacturer, a winery or a metal shop. We have spent a tremendous amount of time trying to figure out whose exposure will be the greatest, so we can be fair to the clients."

"Chubb will be taking a very balanced approach to respond to individual insured exposures, said Mr. Krump. "We have studied the issues by product, by industry type, and are in the process of communicating with agents and brokers -- some over the coming weeks and months."

"Several domestic markets, HSB included, have reiterated that the all-risk policies they're issuing will only cover physical damage that could result from the inability of a computer or embedded processor to recognize the date," said HSB's Mr. Gibbons.

Zurich's Mr. Kaiser said that although the likely impact of the Y2K will probably be "somewhere between" the worst-case scenario and little impact at all, it is certain to cost a lot of money to fix.

If the general market trend has remained unchanged for nearly a decade now, the same is true for insurers' outlook for dramatic change: nothing on the horizon, they say.

"We don't see any change coming. . . .Right now, the market's flush with capacity," said Allendale's Mr. Turner.

A catastrophe generating $50 billion in insured losses might have to occur before the commercial insurance market would turn, said Arkwright's Ms. Sprano.

On the property side, however, any turn in pricing will have to begin in the reinsurance market, where reinsurers will begin to signal that their costs are going up rather than down, said CIGNA's Mr. Kane.

"In terms of anecdotal evidence, we have already started to hear or see a few situations like that," he said.