We at IRMI miss our friends who perished on September 11, and, like you, we are dealing with the anniversary of the event in our own ways. Perhaps one way to honor the victims is to assure that we apply some of the important lessons learned to enable our organizations to deal with the unexpected in the future. Some September 11 lessons:

It is necessary to consider aggregation of different types of risk because viewing it by coverage line can lead to an underestimation of true exposure.
Man-made catastrophes can rival or surpass those caused by nature.
Disaster recovery planning is absolutely critical.
Property insurance limits should be carefully evaluated.
Though difficult to identify and measure, contingent business interruption risks must be proactively managed.

Perhaps the most important lesson is to take time to enjoy life and appreciate family, friends, and colleagues.

All of us at IRMI wish you all the very best during this week of remembrance and reflection. Thank you for subscribing to IRMI Update. Have a great day.

Respectfully,

Jack

Jack P. Gibson
President
IRMI

Risk Tip

Prepare Superior Underwriting Presentations. It amazes me how few agents and brokers appear to take the time to adequately prepare underwriting presentations for risk takers. In that light, here are what I perceive as the three deadly sins.

(1) If you don't know more about the risk than the underwriter, you lose. It is immaterial what the risk is, know "everything" possible about it. If that means studying subject matter, so be it. For example, if the presentation covers a chemical risk, understand the chemicals, know if they are potentially explosive, reactive, nonreactive, etc. Fully understand the physical risk, and have a clear handle on losses and loss potential.

(2) For goodness sake, stop using ACORD forms. Present your clients in a format that includes:

An executive summary
General and physical information of the potential risk
Safety or industrial certifications, e.g., ISO 9001, and their value
Coverage Specifications
Full underwriting information
Complete loss data, and if casualty oriented, you had better be prepared to defend trended and developed losses.
Premium expectations

(3) Never, never ask for a quote. Advise underwriters of premium expectations and be able to defend them.

By: Peter Polstein
Retired Senior Vice President
Alexander & Alexander
New York City
E-mail:

Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. We'll acknowledge your contribution as we did for Peter.

New Expert Commentary

There are now 331 articles on IRMI.com, and many more are in production. Below you'll find summaries of some recent additions with links to the articles.

New Insurance Capacity For Healthcare Liability Risks—New capital is entering the healthcare professional liability sector. Charles Kolodkin discusses four new entrants who have recently begun offering this coverage.
Stand-Alone E-Business Insurance: Who's Buying It, Who's Selling It, And Why?—Mike Rossi provides an update on the e-business marketplace and what e-commerce insurance solutions are being offered for businesses of all sizes and industry types.
Choosing The Right Captive Domicile—In this article, Michael Mead discusses captive domiciles, their importance and what factors to consider when selecting one.
Heavy Equipment Theft And Solutions (Part 2)—This second of four articles by David Shillingford on heavy equipment theft deals with physical measures that can be taken to protect equipment.
Look At All My Friends!—In this article on Sales Call Reluctance, Frank Lee examines the Separationist and the fear this person has of selling to friends.
Duty To Defend In The CGL Policy—This article by Craig Stanovich explains in a clear, concise, and understandable way how the duty to defend provision works in the CGL policy.
How To Organize Information—Gary Blake provides writing tips for today's business professional, explaining how to properly organize information by writing with the reader in mind.

New IRMI Insights

What Does "Separation Of Insureds" Mean (Part 2)—In this second article on the meaning of separation of insureds in the CGL policy, court interpretations of "the insured," "an insured," and "any insured" and their ramifications are discussed.

IRMI Construction Risk Conference

Four 1-Day Sessions Cover All The Bases—As part of the 22nd IRMI Construction Risk Conference, to be held November 11-14 in San Diego, you have four optional 1-day seminars to choose from:

What's Hot in Construction Risk Management
CGL Issues and Developments
Loss Control in Construction
Construction Insurance 101

Be sure to check out the agenda for the rest of the conference and simply complete the online registration form to register. Hope to see you in San Diego!

IRMI Products & Services

New Edition Of 101 Ways To Cut Insurance CostsNow Available —The third edition of 101 Ways To Cut Business Insurance Costs without Sacrificing Protection is a virtual how-to guide of cost-cutting strategies for every major line of coverage. Coauthor Jack Gibson says, "The substantial premium hikes everyone is now seeing on their renewals has revived the need for active management of insurance costs, and this book gives insurance buyers the practical advice and information they need to once again take charge of their insurance destiny." Available for only $34.95, it will save you much, much more on your next renewal—even in this hard market.

Your View: When Will The Hard Market End?

In the last issue of IRMI Update, readers were asked their opinion on when the hard market will end. We received a wide variety of responses, some of which are reproduced below.

As a long time observer of the insurance industry (38 years), it is my analysis and the philosophy that underlies our firm's approach to the business, that the conditions that we are currently facing will continue through 2003 and possibly longer. The reasons for this are as follows:

The medium term economic forecasts do not appear to be bullish and therefore we prognosticate that the investment results on which the industry has depended to off-set underwriting losses is gloomy. Institutional and individual market risk tolerance has diminished in proportion to the losses sustained. Rates will continue to rise for the next 18-24 months and then probably hold steady for a like period of time.

The interest rate reductions that the Fed has made have not fueled a recovery, and future decreases would be minimal since we are approaching almost zero at the rediscount level. We are in a state of economic limbo.

The question of industry reserve adequacy remains unanswered but it is a major number. Whether it is environmental, asbestos, construction defect, workers compensation, or mold as the manifesting cause for the shortfall in reserves, there are challenges to the balance sheets of all long-lived insurance companies that are not being addressed for obvious reasons.

The excess capital that entered the market after 9-11 is not being employed. It has been sitting on the sidelines. It would seem to be actually going in another direction since the levels of return are not considered acceptable. Existing markets are hoisting various financial products to raise capital since the run-up of earned premiums is taxing surplus levels that have been depleted to some degree.

More revelations about corporate misconduct will come to light that will impact the market despite the cosmetic regulations about the CEO warranting the correctness of their audited statements. Market risk has depleted the savings of millions of people, many being retirees, who now find that they have to go back to work to survive.

The threat of terrorism in some form is still a specter on the horizon and there is no reinsurance mechanism at this time that has been created as an industry backstop. Government resources are being spent at record levels for the war on terrorism which takes billions of dollars out of our domestic economy. If we decide to expand that endeavor to include Iraq, who knows that that will do to the United States.

Natural disasters will continue to occur at an unpredictable time and place. Another hurricane Andrew can occur at any time.

Take all of these ingredients and mix them together. If our industry could achieve a level of rational thinking, there would be a high probability that we could avoid the manic and the depressive approaches to industry pricing, underwriting and results.

—John W. Kabaker, President,
Vista International Insurance Brokers, Novato, California

I think today's hard market will continue for a long time for most carriers (especially those who got caught up in the soft-stupid "no underwriting, just get some premium" attitudes of the mid 1990s). But I must confess, as a producer, I was partly to blame. I would go back to underwriters for additional credits when I was about to lose an account. But today it's a different world—with terrorism a constant, mold issues starting to snowball, etc. I fear that we are in a hard market to stay. I would predict that rates will rise about 15-25 percent annually for the next 5 years, then level off for several years. At that point, we may need to redefine "soft" as a leveling of rates, or we may never see another "soft" market in our lifetimes.

—Larry Jansen, CPCU, CIC, PJC Insurance

Yes, it really is different this time, because underwriters are—for the first time, actually—admitting that they don't understand the companies they are insuring (and, thus, also for the first time, are not "giving away" the coverage). The problem is that the best accounts (i.e., translated as "loss free") are seeing 50-100 percent premium increases which, in turn, is spurring a new wave of captive formations and other alternative financing (translated as "non-insurance solutions").

So where will this take us? The market will continue to harden. The best companies (i.e., those that are actually insurable) will continue to leave the traditional insurance marketplace, which will further prolong the hard market. Overcapacity in the insurance market will be wrung out as the "low ballers" will get all the poor risks while the AIGs and Chubbs of the world will get the few quality risks that remain—of course, most of their books of business will convert from primary insurance (now in captives and ARTs) to excess layer coverage. The hard market for primary coverage will continue indefinitely in this scenario, but the market for the excess layers/reinsurance will get competitive again, perhaps as soon as 2004, but I won't look for any relief in 2003.

—Earl Varney, Risk Manager

In response to your request for guesses (and let's not pretend they are anything but) on when the hard market will end, let me begin by stating that I am among the 30 percent of insurance people in the workforce that remember the last hard market.

We believe that the market will begin to stabilize with only modest price increases in 2003, the bulk of which will occur in the long-tail lines. Unlike the hard market of the 1980s, we do not see widespread capacity problems. We do see carriers attempting to migrate their business toward more slot-rated products with less volatility, but this may be as much a concession to automation as a reaction to the market. Clearly, this present hard market is primarily the result of overzealous and under-reasoned investments on the part of carriers who chased rates downward in an effort to raise investment capital exacerbated by terrorist activities. With some analysts predicting that the Dow has another 60 percent to slide, it would be foolish to think insurance prices will stabilize near term. Look for underwriters to start returning telephone calls in 2004.

—Jon Barton

The market will begin softening in the spring of 2003. Spring, after we have followed the poets' advice and at least momentarily turned our thoughts to love, will be the time when we all begin to understand just how massive the market overreaction was and how incredibly profitable 2002 will have been. Further fructifying that appreciation will be massive reinsurance overcapacity which will have been triggered, not by advanced knowledge of 2002's profitability, but by sheer greed. Underwriters will have realized they sold everything off the 2002 shelves at inflated panic prices and wish to continue the feeding frenzy. Finally, and why didn't Adam Smith or Milton Friedman think of this, the oversupply will start a pronounced downward push in pricing which will be discernible in third quarter 2003. Please send the gift certificate for the best answer to...

—Jan Frederiksen

I expect this market to continue until the stock market settles down. The volatility in our economy is the root cause of the hard market—investment income is down and is being made up in pricing. I would predict that the current hard market will remain for another 2 years. If America's companies are not showing improved results at that time, the market will remain firm, with only inflationary overall pricing changes.

—Rich Edwards, CPCU, Commercial Lines Underwriter,
Continental Western Group, Lincoln, Nebraska

I feel that traditional comments like "previous hard markets have tended to be about 36 months" are a little out of tune with what the industry is now facing. They are trying to recover from the tragedy of September 11, 2001; the collapse of Enron and Worldcom, and the ongoing and seemingly increasing threat of terrorism related exposures. There is nothing "traditional" about these phenomena. Mentioning the usual cyclical nature of the insurance industry in the same breath with this market just doesn't make sense. Never before has any industry been called upon to pay a loss of this dimension.

After years of pricing "abuse" the industry was finally beginning to "harden" about 3 to 4 months BEFORE the so called 9/11 event. This correction was long overdue and definitely needed when one thinks back to those days and we find that insurance companies were not covering their underwriting losses with investment gains.

With all the above as background, let me ask a question! Did competition ever leave? Certainly if it has, we haven't seen it in our operation. The business is a competitive as ever; only now, agents, brokers, and risk managers have to REALLY understand the marketplace and how to navigate around the now treacherous waters.

Actually, I am optimistic about the market. By that I mean the market will remain hard for quite a bit longer. This was and is a much needed correction and finally, after all the recent happenings, the industry is beginning to react accordingly. I would be pessimistic if I thought the market was going to go soft again so soon. Why, it's very simple! To do so would put the entire industry in peril and our creditability would be gone forever.

—Robert S. Seltzer, CPCU, President, Cohen-Seltzer, Inc.

I'm positive that we'll see a hard market continue at least till 2004 for many reasons, such as, for instance:

o Higher and frequenting insured losses from natural calamities

o Heavier losses from liability, deteriorating environment, industrial and man-caused risks, BI

o Weakened traditional markets (with alternative markets just born)

o WTC forthcoming settlement

o Worsened financial markets

o Premium hikes and extra income therefrom are unlikely to have replenished the lost capacity by the year of 2004 (will take 2 years at least)

—Yuri Kostin, Risk Manager, JSC Sibneft, Moscow

As an "observer" of the market for over 30 years, and working in a marketplace only a few miles distant from NYC, this particular market cycle has some very different conditions than any past eras. This market was changing prior to 9/11 due to an unprecedented period of aggressive pricing based on one of the strongest growth periods in the U.S. economic history. Many/most insurers were not making an underwriting profit but their projections were based on a so-called soft landing, and the usual settlement spiral of significant claims. The move to shore-up reserves and tighten underwriting had only begun when the stock market began its fluctuations causing many insurers to suffer major "paper" losses, but not causing much panic as long as there was no need to draw significant cash. The higher pricing would improve cash flow and the need to sell stocks was not pressing.

When 9/11 occurred, many underwriters were panicked and did not have clear direction from senior management who had never experienced this type of condition (neither had anyone else). During the remainder of 2001, many discussions and meetings were held throughout the industry in an attempt to determine what everyone else was doing. This period of inactivity, improper activity, and in some cases, knee-jerk reactions by a number of companies, caused a major loss of confidence in both the economy and the insurance industry.

With all of that, a new development swept through the market during the first half of 2002: claims were being processed faster than ever! Not just at the primary carrier level, but at the reinsurance and catastrophe level. The CAT, Agg, and Retro markets nearly disappeared entirely with only faint traces remaining. The demand for sizable payments has already begun and sell offs of significant holdings began occurring during the first quarter of 2002. This does not bode well for the year-end figures for many companies.

The real question for the ending of the market cycle is when is the public confidence going to return? The market has settled into a sort of trough with each wave causing shifts in thinking at all levels of the industry. Interest rates are at a modern all time low, the stock market is well below the most gloomiest of predictions, daily it seems we are bombarded with corporate accounting scandals, jobs are being lost in the tens of thousands, and the possibility of war with Iraq is looming large.

Based on all of that, my feeling is the 2002 underwriting year will continue much as it is well into 2003. Investment portfolios will be adjusted by mid-year 2003 and the new capacity for excess of loss, CAT, Agg., etc, will begin to look for volume. Assuming the stock market has stabilized, not necessarily gone up, but has become more predictable, the market should begin to level off by the end of 2003, and a soft return will begin after the start of 2004.

—Tom Arney, President, The PRM Cos., Albany, NY

I do not believe this will be a typical hard market. There are mega trends at work that have permanently altered the playing field and landscape:

The insurance industry has neither the capacity to pay for nor the ability to price acts of terrorism. Hence, it will continue to be excluded from all contracts. Underwriters will become increasingly reluctant to write what they perceive as a "target" risk: Large industrial complexes, sports facilities, power generating facilities, etc. This will cause a ripple effect through our economy as lenders will become reluctant to provide capital for these projects. Ultimately, this is an exposure the federal government must assume.

There are far fewer insurance and reinsurance companies now than at any time in history with less competition as a result. New capital has been coming in, but this is opportunistic capital looking for a relatively quick and large return.

Over the next 5 years there will continue to be increased movement toward risk pooling, captive insurance entities, RRGs, etc. Any moderate to large size corporation and/or aggregation of businesses with like exposure will ultimately find themselves in some sort of risk pooling mechanism. Primary insurers will assume greater risk and take larger retentions.

Brokers will increasingly become consultants and advisors as opposed to order takers.

In order to survive and prosper over the long term, the insurance and reinsurance industry must become far more proactive and entrepreneurial in lieu of the present mode of retrenchment. They must become true partners with their corporate and small business clientele less that business simply disappear.

—Ben Silberstein, ACAS, MAAA, FCA, President,
AJA Risk Management Consultants, Inc., East Brunswick, New Jersey

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IRMI Update—Issue #48

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