Canadian Underwriter

Curtain Call? On The Hard Market

September 1, 2003   by Vikki Spencer

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As risk managers muddle their way through “Act III” of the hard market, having faced prices increases upon price increases, tighter terms and new exclusions since late 2000, they are well ready for curtain call. No one questions the market has been tough, perhaps the toughest seen in the last half-decade, but risk managers seemed willing to wait out the hard market, understanding that insurers were in dire financial straits and change was needed.

The question is, after facing successive rounds of paying much more for far less, should they not be seeing some signs of relief? The Risk and Insurance Management Society (RIMS) benchmark survey of North American risk managers does show that property premium increases are flattening to some degree. Between second-quarter 2002 and 2003, rates rose on average by 24% compared with increases of 50% or more over the past two years (see Chart 1). On the opposite end of the pricing spectrum are fiduciary rates, up 137% over the same comparative period, and directors’ and officers’ (D&O) which soared year-on-year by 206%.

Retention levels tell a similar story. On fiduciary risks, retentions blossomed by 500% between second-quarter 2002 and 2003, while D&O retention levels climbed by 223% over the same period. This compares with property retentions up just 1% year-on-year (see Chart 2).

According to RIMS past president (current chief risk officer & secretary), Chris Mandel, the rise in liability premiums “would seem to suggest underwriters are concerned over future potential losses…mainly because there wasn’t a lot of loss history there”. Potential class action lawsuits over pension and benefits plans, along with pending shareholder class action suits seem to be prompting action on the part of underwriters. However, there are signs of “moderation”. Notably, Mandel points out, “the property [market] has significantly moderated, to the point some of us are actually seeing a decrease”. Capacity is also returning to the property market, with some insurers offering as much as double the limits they would a year ago.

However, many risk managers are still “keeping their fingers crossed” that they will receive a renewal with little or no increase when, in Mandel’s opinion, accounts with clean loss records should be seeing some reduction in rates. And, risk managers are still seeking more providers to make up limits – where a $100 million program might have required eight carriers in the past, risk managers are now looking at 10 to 12 carriers to fill out the same program.

The RIMS survey results mirror other studies conducted over recent months. The second-quarter 2003 survey of the U.S. Council of Insurance Agents and Brokers (CIAB) also shows signs of flattening in the property market versus steep hikes in liability lines (see Chart 3). But, the CIAB’s president Ken Crerar cautions against taking the changes in the property market as a sign that a “soft market” is likely anytime soon. “Leveling does not mean a soft market is returning. Industry analysts say the hard market is likely to last another 18 months, and brokers expect modest increases to continue in most lines with no great decline in rates.”

A recent survey of commercial insurance buyers in the U.S. by Prudential Financial predicts an end to the hard market by 2005. The Prudential’s survey indicates that 94% of the risk management respondents expect policy terms will be as tight through the end of 2003 as they were in 2002. About 81% of the respondents also note that the renewal process will remain a challenge in the second half of this year.


Comments from Canadian risk managers mirror the U.S. experience. Risk managers point to challenges not only in the liability markets, but myriad lines of business including construction risks, marine, medical and aircraft covers. As well, Canadian companies facing cross-border exposures are being considered vulnerable by underwriters. As Canadian risk managers prepare to meet at the RIMS Canada conference in British Columbia this fall, RIMS first vice president Nancy Chambers, risk manager for Waterloo Region Municipalities Insurance Pool, says, “I expect to hear a lot of discussion of the marketplace, what people’s experiences are going to be, what their expectations are”. The “leveling off” shown in the surveys referred to above are not so much indications of a price softening, but of “a decline in the steepness” of the price increases, observes Robert Patzelt, group risk manager for Scotia Investments Ltd.

Furthermore, Oxford Properties Group Inc.’s director of risk management Ed Martingano notes, “I don’t think anything [in the insurance market] has improved. Certain segments were first to the gate with their increases [i.e. property].”

Rate increases are still being seen, even in the property line and there is a great deal of uncertainty over what will happen in upcoming renewals, Martingano says. Given the huge increases seen in recent renewals on property accounts, he adds, “even 10% is a big [rate] increase considering they are coming on top of big increases [from past years].”

The property line may “flatten” to 15-20% increases, but liability will be hit hard, suggests Joseph Hardy, director of risk management and insurance with Hudson’s Bay Co. He adds that these increases are likely to last until at least yearend 2004. Risk managers agree the hard market will last until 2005, perhaps even 2006, although property may begin to soften as soon as next year.

The “hardships” being experienced are not only about price, risk managers observe. Risk managers continue to struggle with new exclusions, tighter terms, lower limits, and last-minute underwriting. “Maybe we are getting a little better at information flow and expectations have changed,” Martingano says, but underwriters remain over-burdened and the process remains challenging. One challenge, Patzelt points out, is having to deal with even more insurers to make up a program or new markets as insurers realign business strategies and withdraw from certain lines of business.

Information requirements from underwriters do continue to be hefty, says Nowell Seaman, manager of risk management and insurance services for the University of Saskatchewan. But, risk managers may be adjusting to the new environment. “For some people, we’re moving into our third round of renewals in the hard market. Perhaps we’re just not as shocked as we used to be…The initial shock is gone, but you don’t totally become desensitized to it.”


One area insurers are bound to face “sticker shock” is in the liability market. Specifically, D&O covers are likely going to be an issue. “That’s one area where we’re going to continue to see hefty increases and I’m not sure what the reduction in coverage might be,” says Hardy. “The new [D&O] wordings are certainly complicated and we’re not sure how to interpret the exclusions,” admits Seaman. “We’re just not sure what you’re left with once you interpret the exclusions.”

D&O is, for many companies, not a main “pillar” of their risk portfolio and yet it promises to consume a great deal of risk managers’ time and budgets, notes Martingano. In this respect, insurers are often not taking risk managers’ need to adjust to new rates and terms into account, he adds. “Changes are being put in front of us with too little time to review and understand them…Everything is being done at the eleventh hour.” Looking at the overall picture of the casualty/liability class, he notes that “you’re paying a lot more and getting a lot less”.

But, underwriters’ concern over a business line such as D&O may not be unfounded, says Hardy, noting that most insurers have not been charging enough for the risk and are now playing “catch-up” with rates. “I don’t think it’s the premium that’s driving it, it’s the exposure that’s driving it,” he adds.

Nonetheless, he believes that insurers need to behave more professionally in terms of getting policies to risk managers on time. “Sure, it’s a busy time for everyone, but we’re not seeing the deliverables. They [insu
rers] need to get the policies to people.”


Will the troubled market cause more risk managers to seek alternatives? The answer is split, although risk managers agree that alternative risk transfer (ART) options are for very specific applications as they involve a great deal of time and expense to implement. “I haven’t heard of too many people going forward with it [ART]. There’s still not the economic justification. It’s a significant decision, it shouldn’t be made as a snap decision,” says Martingano.

Seaman shares a similar view, noting “most risk managers have looked at, or are looking closely at alternatives, but I’m not seeing a lot more of it [being established] today than a year ago. You have to look at it where it makes sense.” The applicability of ART options to areas where traditional insurance leaves loopholes are scarce, notes Rupak Mazumdar, risk management advisor with the Technical Standards and Safety Authority. “The options available are very, very limited in terms of being able to insure against things like business interruption [for example]. So, it falls on the risk control side.”

Each hard market gives rise to new markets and capacity, with the latest hard market cycle having seen with the rise of the Bermuda “start up” insurers. These carriers, however, have had little impact on overall market pricing, risk managers say. Mandel points out that the price flattening on the property side, as seen in the RIMS survey, is more a result of domestic carriers returning to the market with additional capacity, rather than a flight to Bermuda.

While captives have grown in use during the hard market, the establishment requirements remain a challenge for risk managers. “There is some kind of deterrent to even looking at a captive,” explains Hardy, as captives are still reliant on reinsurance, which is experiencing steep price increases and capacity restrictions of its own. Self-insured retentions have been the most popular response to the hard market, although risk managers must look at all options as senior management seek relief from rising insurance rates.

Chambers, on the other hand, has fielded many inquiries from municipalities looking into establishing an “insurance pool”.

Municipalities in New Brunswick, for example, have done a feasibility study and are now looking at implementing a reciprocal. Such reciprocals probably offer more appeal to public entities, whereas private companies may balk at entering into such an agreement with competitors. Nonetheless, airlines around the world including Canada are currently finalizing approval for a pool to cover certain liability risks.

The biggest factor may be where the market lands when it does begin to come down. If rates revert back to levels seen in the late 1990s, notes Martingano, corporations will certainly shy away from any investment in ART. But, if rates do not drop back significantly, interest may grow. Ultimately, however, risk managers are intent on maintaining relationships with their insurers, and rather than moving to a cheaper carrier in this market, they advise staying with quality insurers and protecting long-term relationships. The hard market has already highlighted the weaker insurers, those who relied to heavily on investments during the soft market and are now vulnerable, notes Patzelt. “The good will always survive, there will be a flight of customers to those [quality] insurers.”


And just when risk managers had their hands full with the insurance market, along came 2003 with a host of new exposures for which insurance is not the obvious response. “It’s just one thing after another,” says Seaman. “This year has been a year of items where insurance is not the issue. Risk managers are being asked to deal with a number of very serious issues for which traditional solutions are not available.”

These range from mad cow disease and forest fires in the west, to SARS and the blackout in central Canada, to fishing disputes in the east. Ultimately, these risks give rise to the importance of business continuity, crisis management and emergency preparedness, observes Mazumdar. “Ever since 9/11, it seems as if we’ve had one event after another.” Nonetheless, he and other sources point to examples of solid risk management response to these events. During the SARS outbreak, Mazumdar notes, many companies responded quickly to quarantine employees when fellow workers were exposed. And, when the blackout hit, says Hardy, “everyone had ramped up their emergency evacuation plans before that. There was some good risk management going on there, whether we realized it or not.”

“The blackout created, for many risk managers and organizations, an opportunity to implement their emergency response plan,” agrees Chambers. “It really worked very well.” Martingano says that such events highlight how risk management is about so much more than insurance buying and brings focus to the fundamentals of risk management: risk identification, mitigation and control. “There have been a lot of significant issues confronting Canada and they aren’t the type of thing you would deal with first through insurance. What we’re really looking at is risk management versus insurance.”

This is the message risk managers want to move up the corporate ladder. As increased awareness of risk makes its way to corporate boardrooms, risk managers face both challenge and opportunity. “There is generally a greater desire [for risk management information] as these risks have come to the fore. Risk managers have always been pushing this, even when it wasn’t sexy,” says Patzelt. “When things get rougher they [senior management and boards] are happy to see the memos coming.”

Organizations are going through a “learning curve”, and the chance is there for risk managers to promote concepts such as enterprise risk management, and to use these very public events to promote up-front investment in risk management. The hope, say risk managers, is that when the dust finally settles from the hard market and high-profile risk events that have emerged, that the risk management function will be viewed as a greater priority within corporate structures.