Future of insurance – Risk Primer
Charles H. Cox
Since September 11, new capital has been injected into the insurance industry from several sources. Insurers themselves have bolstered their bottom lines with unimaginable rate increases at the same time coverage for terrorism has been carved out of countless policies. New reinsurance companies have been formed thereby increasing capacity. The stock price of several large insurers has increased. Some consumer-oriented organizations claim the premium increases far exceed the industry’s needs. Yet, at the time of this writing, the insurance industry is wringing its collective hands waiting for Congress to “give away” terrorism coverage.
The House of Representatives’ version called for a loan program under which loss payments would have to be paid back to the government. Not surprisingly, insurance groups favor the Senate version that provides for a risk-sharing mechanism that, according to some critics, will unnecessarily burden taxpayers. Congress recently ordered the General Accounting Office to review the insurance market to determine if there is a problem that really requires federal action.
Through all of this, the insurance industry’s credibility has diminished and many policyholders will again be looking to see if alternatives provide them with the financial protection they need. Previous downturns in the insurance market have spawned alternative risk financing programs, but inevitably, the soft insurance market returned and buyers returned to the trough eager to take advantage of lower premiums and lower retentions at the same time. It will be interesting to see if the industry yields to competitive demands before policyholders move to alternative markets.
As reported in the Nov. 12, 2001, issue of the Engineering News-Record, Jack Gibson, president of the International Risk Management Institute (IRMI), Dallas, spoke at IRMI’s Construction Risk Conference in New Orleans this past fall and predicted that captives and other alternatives may be returning to favor. He said that captives grew 4 percent each year during the soft insurance market and are now reportedly 40 percent of the market. He predicts they will be 50 percent of the market by 2003.
At the same conference, William McIntyre IV, chairman of American Contractors Insurance Group Ltd., Dallas, an industry-owned captive insurance company, said that costs in the last hard market cycle rose as high as 1,000 percent before it ended. Gibson reportedly added, “If insurers get too greedy, the sucking sound will be insurance premiums going to the alternative market, never to return.”
As discussed in an article written by Russ Bannam in the December/January 2002 issue of Treasury & Risk Management, companies “can simply reduce the amount of insurance they buy to zero if necessary, picking instead from a menu of alternative risk transfer strategies developed in recent years for such an insurance crisis.” The article went on to say that, according to Marsh Management Services, a large Bermuda-based captive management firm, “at least 650 new captives are expected next year to join the 4,500 currently in operation.”
It was announced this past February that members of the Air Transport Association, Washington, were working with Marsh Inc., New York, to form a Vermont risk retention group to provide war risk liability coverage for major U.S. airlines. The availability of that coverage became scarce since September 11.
According to an article appearing on a direct insurer’s Web site, there are five strategies insurance buyers can employ for “buying smart” in the current insurance marketplace. The first one has a familiar ring to it: “Develop long-term relationships.”
Who is kidding whom? When are insurers going to admit they are only interested in long-term relationships until the “you-know-what” hits the fan? How many risk managers will buy into that theory after the Jan. 1,2002, renewal blood bath? More important, how many will come back for more abuse next year?
Charles H. Cox is president of Aldrich & Cox Inc., an independent risk management and employee benefits consulting company in Buffalo, N.Y He can be reached at email@example.com.
COPYRIGHT 2002 Axon Group
COPYRIGHT 2002 Gale Group