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For risk managers of middle market companies, softening insurance pricing may seem like the one bright spot in a generally gloomy economic muddle.

Much like politicians two decades ago debated what to do with the alleged "peace dividend" that would accrue following the fall of Communism, risk managers face the enviable task of either banking away insurance dollars or expanding their coverage realm to protect their enterprise from new and evolving risks.

With rates as soft as they are it is, after all, a buyers market and corporate buyers can afford to play hard ball at the negotiating table. "No matter where the market is, client companies should be doing some type of thorough risk analysis and quantification," says Bill Choate, executive vice president of Aon Risk Services.

For agile risk managers, the opportunities are plentiful...like taking a new look at policy terms and conditions to string that elusive sweet deal and keep premium income steady. Risk managers should capitalize on soft pricing trends to expand the language and broaden the terms of the contracts, brokers advise.

"Perhaps an insurer can offer the same limit on paper at the same premium," says Eric Joost, middle market practice leader with Willis. "But they have expanded the language as to what might apply when there is a loss on issues surrounding claims handling or defense costs."

Or risk managers could use some of their "free time" to close any contractual loopholes that lull buyers into believing a risk was covered when it in fact wasn't. Companies have been known to lose millions of dollars over a misplaced phrase or an errant comma.

"It could be expanding limits of course, but also being able to broaden some of the coverages such as, for example, those inside marine cargo coverage," says Aon Managing Director Cecil Cooke. "There are a lot of transportation issues of clients moving products around the globe so there are ways to enhance wording contracts to make sure you have a broad enough coverage so there is not a loophole."

A soft market, agrees Naveen Anand, senior vice president of CNA, presents an excellent opportunity for risk managers to close what coverage gaps currently exist in their programs. Reviewing contracts never hurts.

In a soft market insureds benefit as they can get contract wording expanded in certain areas of their business interruption policies, says Joost. Trigger coverage that in normal times may have been 10 days magically shrinks to five or even three days. "So when it gets down to one or two days, what you may have is small events that may trigger business interruption coverage," he says.

The largest companies, the Boeings, the General Electrics, the Procter & Gambles, having the luxury of large retentions and therefore taking on the greater risk burden, will have such risks already covered. That makes it easier to negotiate conditions and terms, according to Cooke.

True, the industry has not reached a consensus on what constitutes middle market, but a rule of thumb would encompass those enterprises with annual revenues of between $50 million and $1 billion. But it hardly makes a difference.

Middle market insurance buyers should approach this soft market just as they would if they were buying coverage for the nation's largest companies. "Essentially, all buyers should approach the market in the same way," says Choate. "That is, what is the total cost of risk, of which insurance premiums are just a total part of the fixed cost."

And right now in property-casualty, those fixed costs are going down, which means risk managers have "found money" to be used in whatever way they wish.

With middle market firms today competing in a global economy and facing exposures in India, China and Vietnam, buyers may want to extend the terms of their international coverage or revisit their currency or trade credit coverage, according to the brokers.

"The soft market just creates some dollars that they have not had in place to do some other things which can readily include new international exposures," Cooke says.

As an alternative, risk managers may want to beef up the existing coverage within industries in which they maintain a core competency. In the middle market, says Joost, coverage issues "are driven off the business they are in."

Companies sensitive to data network operations such as retailers and financial institutions are a perfect example. "As the market softens, you see them become more aggressive in buying what are called security products, which is a very new part of the market," says Joost.

In addition to environmental and data security coverages, buyers have shown an interest in product recall policies, says Jane Musgrave, Midwest middle market practice area leader for Marsh. "Certainly anybody who is in food and who is not already purchasing product recall is looking at it," she says.

...And not just in the food services sector. In the automotive sector, manufacturers whose products--trim or pre-fabricated pieces--that go into product made by other manufacturers are also looking at recall policies she says.

"Part of the reason is that there is more capacity and more entrants into this product," she adds. "They are starting to stimulate some competition and minimum premiums are coming down and so there is a bit of a buzz around product recall."

A WEALTH OF OPPORTUNITY

Buyers could do just fine by hanging tough, negotiating better prices or opting for broader terms for property-casualty risks. Hell, in a soft market who doesn't look good just standing still?

But if buyers get bored with that, or if they've beaten their brokers as far as they'll go, or if they want to impress the CFO and gently remind him or her of it at their next performance review, they may want to shift resources to the benefits side of the house where the pricing trend is currently moving north rather than south.

"The best-run companies will take this opportunity of savings on the property/casualty side and shift those dollars and begin to invest on the health and benefits side of the equation," Cooke says. The money can be used to help promote wellness plans and also invest funds into determining what the prime health cost drivers are and try and change that.

"Some of the companies are leaning toward consumer-driven health plans and providing employees with incentives to utilize those plans," he says.

Many clients who have shown payroll and sales boosts in the first quarter have enjoyed substantial premium reductions even if the rates remain flat. That's according to Mike Pesch, Chicago-area based president for Arthur J. Gallagher Risk Management Services.

"In the first quarter we were anticipating our clients would see a fairly significant drop in overall exposure basis, which in the middle market is payroll and sales," he says. "But actually it was just the opposite, with the figures up sort of as a broad brush across all sorts of industries by figures of 3 percent to 7 percent."

He also notes that most clients are not using these savings for additional coverages, "although clearly we try to convince them that this is the right opportunity to purchase either more limits or coverages they may have neglected to purchase in the past."

In the past, risk and benefit managers have operated in different silos reporting to different bosses. But that's begun to change as they grapple with short and long-term disability risk and workers' compensation issues.

Thus, factoring in pricing complexities can become another area of coordination and opportunity for buyers operating in the middle market.

"Perhaps an insurer can offer the same limit on paper at the same premium," says Joost, "But they have expanded the language as to what might apply when there is a loss on issues surrounding claims handling or defense costs."

Middle-market clients in the upper realm closer to the billion-dollar sales mark generally have more complex insurance programs with more "levers to pull" and thus have more options for making use of any soft market savings, Pesch also notes.

With carriers, who typically take on more risk as their middle market clients lower retentions, underwriters are a little freer in providing broader terms and conditions, the brokers say. This is just the time for risk managers to be developing relationships with not just brokers, but the carriers themselves.

That's important, as it positions buyers more favorably when the market turns or when it comes time to cover for the follies of a particular company director or officer.

"What is more important for these larger middle market organizations, particularly those that are publicly held, is to make relationships on the directors' and officers' side, the employment practices side and fiduciary side," Choate says. "Those are very key areas where we think it is important to match up the underwriters with the corporate officers."

When the market hardens again, these risk managers will have had the opportunity to develop valuable relationships with A-rated carriers, "whether or not they keep doing business with them," adds Cooke. Barring that, buyers can use the soft market to trade up to better paper. As some hapless buyers are no doubt aware, there's nothing like filing a claim with a carrier that no longer exists because it failed to set the proper premiums for the risks it agreed to take on.

Anand, of CNA, says the soft market presents an excellent opportunity for risk managers to evaluate their carriers with respect to their commitment to the industry. "Will they still be there when the soft market is over?" he says.

Risk managers always like to think so.

Not all buyers are driving a hard bargain. For buyers satisfied with rates and terms, they have the option of filing away their contracts and reinvesting the savings into their business. After all, what CFO or treasurer turns down a cash infusion?

It's also important to remember that different industries experience different insurance pricing dynamics "both in terms of the industry and the insurance products they tend to buy," Joost adds. As a result, an industry with a lot of liability or casualty exposure may not benefit from the softening trends affecting much of the market.

For example, the credit crisis has created something of a like crisis for financial executives in terms of potential litigation and will be reflected in the products that protect against that exposure. "The unwinding of this credit crisis is causing lots of turmoil with disaffected investors, shareholders and all sorts of things going on," says Joost.

Despite the subprime lending fiasco, the soft market is expected to continue with further rate declines. The Council of Insurance Agents and Brokers reported earlier this year that first quarter numbers indicate market softening has shown no sign of letting up.

Three-fourths of their agents and brokers reported that renewal premiums for their smaller and medium accounts were down by a figure of up to 20 percent, while the decline was even steeper for those accounts generating more than $100,000 in premium.

Cheryl Arvidson, a spokeswoman for the Council, says that brokers reported looser underwriting standards and more options regarding coverage and deductibles.

"Some carriers are now throwing loss runs out the window, and some are developing appetites for risks they have not written before," Arvidson says, quoting a broker from the Southeast. "It's a 'whatever it takes to write' mentality for many carriers right now."

That jibes with other fingers in the wind, say they experts.

"When you look at the most recent results, insurers still seem to show a lot of profitability," Joost says. "So to us it still seems to be in a softening phase."

Even the seismic $7.8 billion loss reported by AIG for the first quarter of this year stemming primarily from credit crisis issues does not belie that contention. "When you look at their pure insurance results, they are fine," Joost says.

STEVE TUCKEY has written on insurance issues for a decade for several national media outlets.

August 1, 2008

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