future," says Meltzer, a former chairman of the Risk and Insurance Management Society (RIMS). "We were partners, after all."

Alas, the veteran risk manager has learned, when push came to shove,

business prevailed over sentiment.

"It was all lip service," says Meltzer, who is assistant vice president of

insurance and risk management at SunLife Financial, a Toronto-based financial services company with C$326 billion of assets under management.

"They didn't want to lock into anything down the road, and I'm talking a pretty short road. They wouldn't allow me to roll [any] policy over again – I

was told it was a one-year deal or nothing."

Business insurance premiums went through an unprecedented "soft" period

throughout the 1990s, provoking most risk managers to shop around for one-year deals with confidence that rates would keep falling.

Property/casualty insurers, of course, begged clients to think about the

importance of building long-term connections and worked overtime to recast themselves as true collaborators in risk management and not just sellers of

commoditized products.

Many risk managers, to be sure, didn't buy the rhetoric. "To be honest, I

never believed that line about 'partnership,'" says Brian Schell, vice president and treasurer of H&R Block, the $3 billion-revenue, Kansas City,

Mo.-based financial services company. "My job is to forge relationships with financial institutions. Well, I have learned there is no such thing as a

long-term relationship unless each party gets benefit. Insurance companies are in business to make money, not be your best friend."

Some veterans who had been through "hard" cycles, though, took the

insurers at their word.

"I spent 10 years building this relationship to protect the company from a

hard market," Meltzer says. "Now I realize I didn't accomplish anything.

The relationship was the first thing to come off the table."

The hurt goes far beyond personal relationships, of course. Rates are

skyrocketing just when a doleful economy is squeezing corporate budgets. Rates for property and casualty have risen an average of 10% to 15% over

the past 12 months, and that's for companies with excellent claims loss

ratios.

The Council of Insurance Agents and Brokers, a Washington, D.C. trade

group, tracked double-digit increases in this year's second quarter alone in five property/casualty lines: automobile, workers compensation, property,

general liability and umbrella. Less than one percent of CIAB members reported premium decreases.

"It's a tough time for a treasurer or risk manager to bring this news to an

embattled CFO," says George Mikes, chairman of the North American risk management practice at New York-based insurance broker Marsh.

Remedies, No Cures

Not surprisingly, many risk managers are trying to soften the blow by

reducing their insurance purchases. Retentions–the amount paid out of a company's own pockets before insurance kicks in–are rising and

coverages are falling.

"When I went to renew my liability policy late last year, the rates were so

high I had to do something to mitigate the cost," says David Parker, director of risk management for Pima County, Ariz., the nation's seventh-largest

county. "So I doubled our risk retention from $1 million to $2 million. Even with that, my rates still climbed 13.4%."

Parker also restructured Pima's liability program to include two additional

insurers in the mix of loss layers. And he removed employment practices liability from the upper catastrophic layer of his program, which saved

$10,000. "I don't see potential losses here seeping into this layer," he explains.

But in his recent renewal of the county's workers compensation policies,

the best the Tucson-based risk manager could negotiate was a 10% rise in premium, despite having doubled Pima's risk retention to $500,000.

As for property insurance, Parker was hard-pressed to do anything but take

a 35.5% premium increase. "I retain only the first $50,000 of loss on the program, meaning I pretty much insure the entire risk," he says. "It's one

thing to self-insure liability and incur a loss, but quite another to lose a 20-story county building and the self-insurance trust

fund to boot. So,

basically I have to bite the bullet here."

The Captive Boom

Many insurers, stimulated by rising claims and payouts across a wide range

of lines, also are demanding that insurance buyers increase their retentions. Not surprisingly, then, self-insurance through captives and other

programs

are on the rise.

"Every day I get a call from somebody saying they either want a new

captive or want to reactivate one that they've kept dormant," says Jill Husbands, senior vice president at Marsh Management Services (Bermuda)

Ltd. "The first six months of this year have been absolutely incredible."

Marsh's Bermuda office created or assumed 24 captive programs for

clients as of June 30, twice as many as in a typical year, says Husbands. (Marsh took over administration of eight of those programs from other

companies.) And an increasingly large number of clients with active captives are putting additional lines of business into them to

counter the

mandated rate hikes from outside insurers. Most captives are used to insure traditional lines of business

such as workers compensation, general liability

and auto liability, but some clients have been researching adding property lines to the mix, says Husbands.

Captives also permit companies to access the reinsurance markets directly,

which generally creates savings. However, they only make sense for companies with good loss histories, who can negotiate strongly with the

reinsurers, Husbands warns.

H&R Block has long insured most of its risks through a captive, says Schell.

It also uses the captive to sell insurance coverage to its tax preparation franchises. "By writing this third-party business, the captive qualifies for

preferential tax treatment," Schell notes, adding that wasn't the prime motivator. "We didn't want to be held captive

to the gyrations of the

property/casualty insurance market. We wanted consistency in pricing."

Schell concedes that the soft-as-pudding insurance market of the nineties

tested his resolve. "There were several times when a competing broker would come in with a guaranteed cost program for a particular line of

insurance that was less in cost than what we were funding through the captive," he says. "I was tempted, and it took discipline not

to jump. Now

when I see other treasurers bowing their heads, it makes me feel really smart for sticking to our

knitting."

Block, which has packed workers comp, general liability, property and

errors and omissions into its captive, has experienced price hikes in the excess coverage it buys from reinsurers to transfer catastrophic risks. But

they are "nothing compared to what underwriters are asking for in the lower layers," says Shell.

No Panacea

Self-insurance goes only so far, however, as Jean Van Tol has learned. She

is president of the Resort Hotel Insurance, a general liability insurance captive that was founded during the hard market of the mid-1980s by 50

resort hotels, including The Breakers in Palm Beach, Fla.

The captive was deactivated in the 1990s because of the soft market, but

the licensure was retained. When Van Tol went to reactivate it last May, however, she found the fees quoted by fronting carriers to be an

insurmountable problem. (Fronting carriers assume a captive's workers comp and some

other risk on their books for regulatory and claims-paying purposes, but cede most of the risk back to the insured via a reinsurance

contract.)

"The fronting carriers are following the pricing of the traditional market,

which we felt was too high," says Van Tol, who is based in Burlington, Vt.

So the resort hotels continue to buy property/casualty coverages from the

traditional market, with trepidation. "Our members' program previously was guaranteed cost, basically coverage for first-dollar losses on up," says Van

Tol. "Now there's a self-insurance retention [SIR] varying from $10,000 to $100,000, depending on the hotel member.

Even with this SIR, the cost of

insurance is considerably higher, at least 25% more."

The best approach risk managers can take to modifying rate hikes is to go

back to basics–improve internal risk control methods and teach everyone to document incidents, says Marsh's Mikes.

By reducing risk and "proving it," he says, risk managers can differentiate

their companies from others. "You need to focus on the components that go into rates that are within your control, and then lower the risk of those,"

Mikes says. "For example, with D&O insurance, you can improve your record

keeping, indicate your prior litigation track record, show how you are approaching corporate governance issues, indicate the quality of your

management team and your previous history with a carrier–all of which demonstrate your competence in risk management. The more

in-depth

information and the less 'unknown' you provide the insurer, the better your rate will be."

The Value of Detail

One of the best lines to work on is property, since underwriters generally

price these policies with very little detail. "Typically, a company would simply list total building values and the underwriter would quote a rate per

hundred dollars," Mikes says. "To get appreciative underwriting consideration, especially with a new carrier, you need to pack on the detail."

He recommends deluging insurers with building construction data, catastrophe modeling metrics, a complete loss history, loss control

engineering surveys and expected loss runs performed by a third party.

SunLife's Meltzer only laughs at such advice. "We already distinguish

ourselves," she says. "I won't say we're the perfect account, but we're

very close to it. During our three-year program, we provided the underwriter information

as if we were renewing for an annual and not a

multiyear policy. I kept in touch with them constantly regarding anything we did, giving them enough data to sink a ship."

It made little difference. "The game right now in the insurance business is to

make sure they can charge more–no matter who you are," she says.

Yet despite her newly hatched skepticism, even Meltzer thinks that

competitive forces may bring some relief.

"What I find interesting is that the primary carriers are telling me they can't

do long-term deals because their reinsurers won't support them in their treaties," Meltzer says. "Yet, these same reinsurers are knocking on my

door and the doors of other risk managers telling us they want to get closer to the front-line customers–us. The cynic in

me would see this as a way

for reinsurers to increase their market share by competing against their traditional

customers, the primary insurers."

To be sure, several new risk-management tools exist today that could offer

some relief. Concepts such as alternative risk transfer mechanisms through the capital markets and enterprise risk management will get their first real

tests in today's environments, experts say.

For the most part, risk managers view alternatives such as integrated risk

and combined lines programs, insurance securitizations, double-trigger policies (two different losses must occur for the policy to pay) and finite-risk

solutions (spreading expected losses over multiple years with the possibility of a premium giveback in a given

year) as too expensive.

"Concepts like combined lines were much more attractively priced in the

soft market," Mikes acknowledges.

Nevertheless, few risk managers see any relief coming in the near future.

"The heartache gets worse" every six months, says Pima County's Parker, recalling his efforts to renew policies since August 2000. "What worries me

is I didn't get any letters last year. That tells me the premium increases I got were just the front end of what's coming down the pike."

The insurance industry argues that it is simply starting to collect its due. "I

know it's difficult for risk managers to tell their CFOs that they need an extra 15% in the budget for insurance next year, but you have to put that in

perspective," says Robert Hartwig, chief economist at the New York-based Insurance Information Institute.

"Insurers competed tremendously for

business in the '90s, causing premiums to decrease by 40% to 50%. Had they not done much in the way of competition, the rate decreases would

have been more like 25%."

Rising Jury Awards

Hartwig says that rate increases are particularly aggressive in workers

comp and general liability because of medical care inflation and skyrocketing litigation costs. "The average jury award for a general

business negligence type of suit in 1993 was $759,000," he says. "Six years later that more than doubled to $1.7 million. The doozy is

product liability,

which went from $1.4 million in 1993 to $7.4 million in 1999."

Meanwhile, property insurance rates are 10% higher, on average, due to

weather-related catastrophic losses, while commercial automobile rates are up 11%.

And specialized insurance lines, such as litigation from employees over

dismissals and from shareholders against directors and officers, are headed for serious tightening of terms, conditions, coverage limits and pricing. (See

"Angry Workers.")

Insurers aren't to blame for the price upheaval, says Mikes. "The rates are

going up because claims and loss activity have skyrocketed," he says.

Hartwig argues that despite the recent premium escalation, insurance costs

are still 25% lower than a decade ago. The cost of risk per $1,000 of revenue (across all industries) was $8.30 in 1992 and is $5.20 in 1999, a

37.3% reduction, he asserts. "The risk manager should say to the CFO, 'Through my astute abilities, we have had six or

seven years in a row of

lessening cost to finance risk,'" the economist advises.

That's cold comfort, of course, to risk managers feeling heat from their

bosses. Pima County's Parker says his biggest management concern today is controlling expectations. "Am I making sure that county officials know

what we're facing?" he asks. "You better believe it."

At SunLife, though, Meltzer says she is not losing any sleep over the

premium increases because her management understands risk management. "My view is that I won't get fired if rates rise 10%, but I will get fired over

a contentious $50 million claim," she says.

Angry Workers

Three out of five companies will be sued this year for wrongful job

termination and 60% will be sued for sexual harassment, according to law firms Littler Mendelson of San Francisco and Jackson Lewis of New York.

The volume of employment practices liability cases is so thick that it currently represents 33% of the federal courts' backlog.

The current economy has only exacerbated the statistics, experts say,

because of the relentless pace of downsizing.

And many companies find themselves defenseless because they have not

taken a careful approach to layoffs.

Not surprisingly, more companies are looking into employment practices

liability (EPL) policies–developed about five years ago as an inexpensive tack-on to general liability–to counter claims from laid off workers that

they have been discriminated against.

But they are finding that it is no longer cheap. "Unlike other liability

coverages that are [financially] catastrophic by nature, EPL is both high severity and high frequency, with the number of claims rising 30% a year,"

says Gina Higgins, managing director at FINPRO, which houses insurance broker Marsh's EPL practice.

"These kinds of claims take about four years to wind their way through the

system, which means we're just now starting to see the losses hit insurers'

reserves. And since EPL to a large degree is conditioned on the economy,

this may be only the tip of the iceberg."

Experts say that companies can mitigate their risks by taking second and

third looks at their approaches to downsizing.

"Typically, when a company is looking to trim the bottom line through

layoffs, they target the more senior individuals with the fatter paychecks," says Ann Longmore, senior vice president at New York-based insurance

broker Willis Global Financial and Executive Risks. "It's against the law,"

and not just because many of those let go are over the age of 50.

"There is this huge swath of people in their late 30s [who are filing

discrimination lawsuits]," Longmore says. "They may have started working for the company in the mailroom when they were 19 years old. They're

targeted for firing because they're costing the company too much in vested benefits." –R.B.