Making the Most of the Market

Risk managers are taking advantage of what some call “cut-throat competition” in the commercial insurance market by clearly articulating their risk transfer needs. A prolonged soft market means not only rate cuts and better terms, but also the flexibility for risk professionals to negotiate a broader palette of offerings from their brokers in everything from risk retention analysis to actuarial services to captive feasibility studies. Some are using this period to restock their risk arsenal; others are just taking the rate.

THE BUYER’S MARKET

The soft commercial market, now going on three years, is accelerating a shift in broker-risk manager relationships, according to some sources. While this transition has been taking place for several years and includes a move to more fee-based services, the competitive conditions mean risk managers can ask for, and get, a bigger bang for their buck.

This can translate into several things for the individual risk manager or purchaser of insurance, such as more information about potential risk-takers on their programs, better access to property and casualty insurer results, access to more high-quality data, improved benchmarking tools or more in-depth consulting services related to enterprise risk management. Or it can just mean getting the cheapest deal on the market.

“Today’s soft market has the buyer in the driver’s seat, looking at brokers to differentiate themselves through pricing models, service offerings and high-touch relationships,” notes David Bradford, executive vice president with Advisen Ltd.

Advisen published a Broker Services and Remuneration Survey together with the Risk and Insurance Management Society (RIMS) in April. It also publishes jointly with RIMS the quarterly benchmark survey; as of April 4, the benchmark survey observed that, if anything, the soft market is gaining momentum. In its review of first-quarter results, the benchmark survey showed that property premiums fell on average 6% -the largest quarterly decrease since Hurricane Katrina. General liability rates continued a string of modest rate declines, dropping by 2%.

In Canada, the MSA/Baron Outlook Report, also released in April, notes the “commercial lines arena … is in the midst of cut-throat competitive pricing. Despite the plummeting pricing, underwriters have yet to bear the consequence due to relatively benign claims activity in the year. Without any real pain, the soft-pricing saga is expected to go on for awhile yet to the dismay of brokers and underwriters alike.”

Some sources say certain industries and lines of business are showing early signs of rate stiffening, but no one is predicting a hard market anytime soon. Plenty of capacity, solid loss ratios in commercial property and liability, relatively cheap reinsurance and intense competition between large commercial players and multi-line companies mean that, barring any kind of catastrophic loss, lower premiums are here to stay for at least the end of 2008 and well into 2009.

In addition to observing decreased rates, risk managers are also witnessing a willingness on the part of underwriters to negotiate attachment points and sub-limits on liability policies. In fact, instead of taking rate reductions, many risk managers are seeking higher retentions on excess and umbrella policies.

“Many are looking at the upper level of their protection to see if it is, first, consistent with what others are doing and, second, sufficient for their own operations,” says Michael Stonehouse, a risk consultant with Armour Riley Inc. “They have tended to rationalize the level of liability protection. That kind of assessment has been a factor during the soft market.”

Joe Restoule, leader of risk management for NOVA Chemicals Corporation, observes the following: “When we entered the soft market over two years ago, underwriters were prepared to relax on pricing, but wanted to hold fast on attachment points. They felt that on the books they were underwriting, they had done a good job of getting people to take the right deductibles. Last year and this year, I am finding a relaxation of that.”

Underwriters’ willingness to compromise is further illustrated by their retreat on terms such as margin clauses. For example, at the height of the previous hard market, margin clauses — which impose a cap on loss recoveries for each covered location equal to a percentage of the values declared for the location — were placed on many blanket property coverages. This diluted or reduced the single blanket amount of coverage available to any one specific location. Today, the margins are up for negotiation.

“In the softer markets, some of the things implemented in the past, such as margin clauses, are more open to change,” notes Phil Corbeil, risk and insurance coordinator for the City of Calgary. “We are trying to get our margin clauses taken off our property policies, or at least to get the cap increased.”

Risk managers also see a greater flexibility on forms and wordings due to plentiful capacity. “The coverage forms and some of the extensions the companies offer as standard vary, and that can make a big difference,” says Nowell Seaman, manager of risk management and insurance services for the University of Saskatchewan. “We can look and say: ‘The pricing is very much the same, but somebody has a better form.’Today, you have a better selection in coverage forms.”

This kind of “open-for-business” marketplace means the deck is heavily stacked in favour of risk managers, who know they have room to maneuver in current conditions and ask for better and improved services — or switch brokers.

“I am not sure if risk managers are demanding more services from brokers, or demanding better quality of service,” says Restoule. “I actually see it as a great opportunity for brokers to show clients how they are different through quality of service in such areas as loss reserve analysis for captives and exploring alternative risk financing.”

Seaman agrees risk managers are clearly spelling out their wish lists when it comes to dealing with brokers. “I think your expectations are more defined or better-defined in the current market,” he says. “You are seeing this in terms of it being more clearly articulated in broker agreements. I think that holds true whether you are changing brokers or staying with the same one.”

Corbeil adds risk managers must be able to benchmark or rate their brokers to see how their brokers are doing when it comes to exploring opportunities that exist in the marketplace.

Brokers confirm they are well aware of the heightened demands of risk managers in the current marketplace. “There is competition in the market to enhance services, to provide better value and to do different things for clients,” notes Peter Cleyn, vice chairman of Marsh Canada Ltd. “I would suggest this is being driven more by the supply than demand side.”

Bill Besse, senior vice president and regional manager of client services in Ontario for Aon Reed Stenhouse Canada, says competition is a natural consequence of a soft market. “So we try to differentiate ourselves with the value propositions we bring to our clients that other brokers may not, especially in terms of loss and retention analysis and risk control work.”

John Chippindale, president and managing principal for Integro (Canada) Ltd., argues that risk managers are looking beyond the usual services associated with brokers. “Risk managers expect you to have industry experts who understand their business,” he says. “They expect you to have claims experts. They expect you to be able to do retention analysis. But two areas we see they increasingly want help with are first, ‘substantiated analytics,’ which help them make accountable, quantifiable decisions and second, evolving an enterprise risk management philosophy within their company.”

Bradford acknowledges the bar has been set higher for many brokerages in the risk management arena. “For a number of ye ars now, brokers have come to the conclusion that insurance placement is not really going to be how they differentiate themselves,” he says. “Whether they will win and retain clients now hinges on all the ways they can provide risk-related services to them.”

The same is true for insurers as well, according to sources. “Risk managers are not looking for insurers that simply offer insurance product,” says John Nolan, senior vice president of specialty commercial lines at Aviva Canada. “They are looking for claims management, risk control services [and] sometimes actuarial expertise. They are looking for ways to control their own costs, to manage their claims.”

Chippindale says Integro “spends a lot of time and effort collecting data so we can help clients understand exactly what their risk exposure is, what their susceptibility to a claim is, and then exactly modelling it. If someone buys a $200- million casualty limit, they want to know the right cost of capital that should layer all the way up. They want to be educated on what the exact nature of their risks are and how to make empirical decisions based on that.”

Cleyn believes risk managers in today’s market are much more savvy about identifying their information needs. “It is night and day with risk managers from 10 years ago,” he observes. “The degree of information they ask us to provide them with respect to potential risk-takers on their programs — they are much more astute and driven on the information they are requesting on their risk partners.”

And yet, in spite of all of these heightened demands and the positive market conditions existing for insurance buyers, Advisen says its broker services survey reveals there is a comparatively large gap in services delivered to risk managers across various industries. Bradford notes Advisen’s study of risk managers showed “an unexpectedly large number of respondents said they do not receive core broker services such as program structure benchmarking, premium benchmarking and policy wording comparisons within the standard services covered by normal broker compensation.”

The fact that 40% of respondents said they did not receive these services surprised Bradford. “We assumed that something like program structure benchmarking was a standard thing that brokers would be providing on a routine basis,” he says. “Perhaps some buyers are not aware of it, but should be asking for it.”

Advisen also notes the most common “non-core” services purchased by risk managers include property loss control, claims administration, captive management and actuarial services. In fact, risk managers are eager for brokers to offer even more fee-based services such as enterprise risk management consulting, Bradford points out.

In response, some brokers say the generally lower rates offered during the current soft market might make it possible for insurance purchasers to take their eye off the target of loss reduction and risk management. “The softening of the market has, in some cases, driven deductibles down, which devalues some added services that are available like loss control and claims administration,” notes Cleyn. “That is a subtle change that happens over time.”

Jim Aston, president of Sinclair-Cockburn Financial Group, is more blunt. “There is less motivation when the cost of the insurance comes down to introduce risk management tools, so they lose their value as a consequence of premium reductions,” he says. “It is hard to get an audience with them (buyers); they appreciate the effort, but I find there is not a lot of follow-through. It is not on the radar anymore as an important issue.”

This fickle view of loss reduction is short-sighted given the cyclical nature of the property and casualty insurance industry, several sources point out. They add now is the time to secure relationships and focus on risk reduction strategies, before the market turns.

“We are always saying to our clients: ‘We are in a soft market mode and your broker has been able to get reductions, but we know this will change,'” notes Stonehouse. “It might not be this year or even next year, but the question is not if, but when. The other question is what factors insurance purchasers should be looking at when things start to change.”

Besse says his company’s longer-term clients understand the insurance cycle and its typical features of excess capacity, declining premiums and increased competition. “They also believe they have to be proactive and build those relationships with the insurers during these times,” he says. “The market pressures are there, but they also understand they are accountable for their own claims history.”

For risk managers, loss reduction is a goal to be achieved in addition to securing low insurance rates. “The issue of loss reduction is not just driven by your insurance premium, but by your reputation,” concludes Seaman. “At the end of the day, a loss doesn’t just have a financial effect, it also has a reputational effect on your organization — and perhaps most importantly, it has a human effect. There needs to be more marketing done to convince people to do more on the loss reduction side. Because that is what is going to keep the market stable, isn’t it?”

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When the soft market emerged over two years ago, underwriters were prepared to relax on pricing but wanted to hold fast on attachment points. Last year and this year, there is a relaxation of that.

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Risk managers are increasingly seeking help in two areas: 1) ‘substantiated analytics,’ and 2) evolving an enterprise risk management philosophy within a company.