US risk managers look to take control of the insurance cycle

A recent survey undertaken with over 130 risk managers from companies across the United States (over 60% of which have annual revenues of US$1billion or above), on behalf of Miller Insurance Services Limited (Miller), reveals that risk managers are looking to take more control of the insurance cycle and are increasingly aware of their total cost of risk. Despite softening insurance rates, many insurance buyers are planning to increase retentions and further explore their use of captives.

“This survey shows that some risk managers are maintaining retention levels or even taking higher retentions, which is unusual in a softening market. This demonstrates a savvy understanding of the cost of risk. They are making their buying decisions based on the amount of risk their organisations can absorb, rather than lowest premium prices,” observed John Eltham, North American Business Leader at Miller Insurance Services Limited.

The Miller US risk manager survey reveals:

Growth in the use of alternative risk transfer solutions
The cycle is not gone, but there is less appetite on the part of risk managers to merely accept its more volatile aspects:

53% of risk managers are considering alternative risk transfer solutions, despite softening rates and entry of new capacity into the market;
Captives are the most popular route for risk retention and ‘smoothing’ the cost of insurance, but they are still relatively underused with only 28% of risk managers saying they use them and 50% indicating they plan to be doing so in the coming year.

Coverage: conventional, non-conventional and Enterprise Risk Management (ERM)
ERM principles mean risk managers need to be even more vigilant in identifying and managing their business risks. The survey results highlight risk managers’ main insurance purchase priorities:

When asked whether the conventional and non-conventional risks discussed in the survey accurately represent the enterprise risks facing their companies, an overwhelming majority of insurance buyers (76%) said yes;
Corporate governance is the overriding concern of the boards of US companies, and reputational, personnel (the lack of suitably qualified employees), foreign exchange and competitor risks were cited as other issues affecting ERM;
Property and casualty insurance tops the list of conventional risks that insurance buyers are looking to purchase;
Intellectual property is the most popular non-conventional risk that risk managers are looking to buy, with 47% viewing this as ‘highly’ or ‘somewhat important’;
52% view terrorism insurance as ‘highly’ or ‘somewhat important’, but only 19% say they currently purchase cover;
Supply chain and trade disruption insurance is considered ‘highly’ or ‘somewhat important’ by 41% of buyers but only 31% say they currently purchase this product;
Only 7% of risk managers said carbon emissions were on their board’s agenda, and 72% said they were not being considered, 21% did not know;
There is a fairly high degree of satisfaction with the product offering from the insurance sector. However, coverage issues exist either through lack of products or unavailability due to unacceptable prices and terms, in particular for Gulf of Mexico windstorm, cyber risks, construction defect, warranty, terrorism, pollution legal liability coverage and coastal flood.

Pricing volatility expected in the next 12 months
There is little consistency in pricing anticipated, with some risk managers predicting decreases; other expecting prices to remain the same and some foresee increases:

39% of insurance buyers expect their overall premium spend to drop between 1%-24% and 12% expect their spend to remain the same, whereas 38% think their premium spend will increase by 1%-24% and 2% expect more than a 25% increase;
64% of risk managers expect retention levels to remain the same, 24% predict a 1%-10% increase and only 5% anticipate a decrease;
59% of buyers surveyed expect property and casualty prices to soften between 1% and 24%, but 35% expect them to remain the same or increase by 1%-24%;
There are split views as to whether the price of directors’ and officers’ liability cover and property insurance will decrease or remain the same, with just under half saying pricing will decrease by 1% and 24% and the rest of the respondents saying they expect prices to increase by 1%-24% or remain the same.

The Spitzer effect
Most insurance buyers do not believe that they are benefiting from cost savings generated by a reduction in contingency fees:

56% believe the savings from contingency fees are being retained by insurers, with only 7% saying they are being passed on to the buyers and 36% say they do not know whether they have benefited or not.

Market selection
The choice of market is based on a wide range of criteria, not just pricing:

85% of risk managers surveyed place breadth of coverage as ‘highly important’ to their insurance purchase decisions. 73% list the financial strength of the insurer as ‘highly important’ and service is the highest priority for 65% of risk managers. Price of coverage came 4th on the list of 63% risk managers’ purchase priorities;
80% of the risk managers questioned placed their business in the United States, 19% use the London market, 14% the Bermudian market and 11% other international markets.

Broker selection
The survey highlights the fact that buyers seek professionalism from their brokers. Buyers also viewed ethics and integrity as being ‘highly important’ in their choice of broker:

98% of respondents view speed of response and quality of personnel as the most important service aspects of a broker, accessibility (97%), specialist knowledge (96%) and market influence/connections (92%) were viewed as the next most important criteria. Other important service features included client and business knowledge, ethics/morals and expertise.

John Eltham concludes: “Risk managers - for the most part - give the industry good marks for its traditional coverages. However, the results of the Miller survey reveal that the insurance industry needs to be responsive to the needs of the buyers, ensuring it provides the right products, for the right price, with the right terms and conditions or it risks losing market share to the growing alternative risk financing market.”

Notes to the editor:
For further information, graphics and additional survey statistics please contact:

Charlie Evans on Tel: +44 (0)7769 648812 or e-mail: charlotte.evans@miller-insurance.com

or Daniel Coles on Tel: +44 (0)20 7031 2560 or e-mail: daniel.coles@miller-insurance.com

About Miller
Miller is a leading independent specialist insurance and reinsurance broker, based in London operating internationally and at Lloyd’s. Founded in 1902, Miller now employs over 500 people and handles an annual premium in excess of US$1.5 billion.

In North America Miller operates on a wholesale basis through retail brokers and managing general agents.

For further information visit: www.miller-insurance.com

About the survey
The survey was commissioned by Miller in association with National Underwriter Property & Casualty magazine (NUPC). The research was undertaken by Litchfield Research, an independent research firm based in Marietta. GA.

Two surveys: a telephone and a web were conducted, over a four week period in February and March 2007, with subscribers of NUPC across the US. A total of 19 respondents participated in the telephone interviews and 230 in the web survey. The results were broken down by two function groupings: risk manager/insurance buyer and other, for the purposes of the survey report only the views of risk managers/insurance buyers were used.

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