For instance, take workers compensation insurance and liability coverages for which companies were already retaining a higher level of risk. Danbury, Conn.-based Praxair, a specialty gas supplier, has tripled its retention for workers compensation insurance, a casualty line, under its last contract with ACE USA. With workers comp, Praxair has had "very, very good experience," says Inserra, with adverse experience trending downward. Praxair's policy covers 23,500 employees in more than 600 locations, including 300-plus plants.

Industry Inconsistencies

Admittedly, though, some companies are far ahead of others when it comes to being able to analyze risk accurately. "There is no consistency across the market or even across industries in risk retention levels or areas in which people are getting higher retentions," says Judy McDonald, corporate risk manager at Detroit-based Comerica Inc. and a board member of the Risk and Insurance Management Society (RIMS). It depends on how well a company has "done its homework." Comerica expects to take on more risk itself and focus on loss prevention, now that a three-year contract for property insurance is up for renewal.

A company's ability to assess risk waxes and wanes with the market as well. Prager points out that during a bull market, executives are willing to make the investment in quality control, hazard risk and even in-house engineering staff. But "in times of stress these are the first things to go," he notes. "We tell them to resist these kind of choices and understand the value of those activities in reducing loss frequency, loss severity, etc."

Risk retention can take many guises. One that hasn't been seen that much in recent years is the pooling of risk within an industry or other group. Currently, such a possibility is being discussed among major department stores, according to Pat Lawson, director of risk management for Ames Department Stores Inc. But Ames, which is currently in Chapter 11 federal bankruptcy protection, is evaluating all its options for cost cutting or at least stability, including higher deductibles–another popular risk retention strategy.

'Rent-a-Captives' on the Rise

Seeing its risk management peers doubling and even tripling their deductibles, Ames has been asking itself whether it gets enough of a reduction in premiums to justify such elevated deductibles, says Controller Mark von Mayrhauser. In workers compensation coverage, it ultimately decided to maintain its risk retention level because raising it probably wouldn't have given the department store "any significant savings increase," he notes.

But middle-market buyers are looking to jack up deductibles. Margaret Klose, Chubb Corp.'s alternative risk manager,cited a client with a $100,000 deductible who renewed at a $250,000 deductible. Clients with no deductible are starting at $50,000 or $100,000 this year, she says. "That is what we are seeing across the board."

Another growing area of corporate interest is the captive market–although, as Klose says, "it's a walk-before-we-run situation." The so-called "rent-a-captive" is an arrangement in which an agent places a book of business into an insurer's captive program and shares in the losses but also the profits. One's own captive insurer is "a pretty big commitment," notes Alan Driscoll, Chubb's manager of risk management worldwide. Still, Klose expects the captive market to take off in the next year, but clients often choose a larger deductible before the captive route. An executive at Hartford Financial Services Group reports significant increases in its rent-a-captive program since Sept. 11.

Property coverage has been a problematic area with much higher premiums that even increased risk retention can't offset sufficiently. For instance, Phoenix-based Phelps Dodge Corp., a mining and manufacturing giant with 14,500 people in 27 countries, saw its premium increase almost 60% when it renewed on Jan. 1–even though it actually doubled its retention this year, according to Rick Freis, Phelps' director of environmental risk management. Phelps now retains about 15% of its policy limits in property. Phelps has also cut some coverage, but only items that cause very low risk for the company. It is "doubtful" they will be reinstated later, Freis says. "Brokers are telling me that they certainly are expecting terms to be more favorable than they are now in one year, so we are choosing to renew again in a year," he says.

Ames' Lawson is like-minded: "I really think by the end of this year…or early 2003," the market will stabilize because insurers will at least be able to factor in 9/11 events and Enron with more predictability.

Nevertheless, insurers, which are selling products at the highest fees ever, are not so sure. "Nobody can predict a softening in the market," says Chubb's Driscoll. "I would be very surprised to see a fourth-quarter turn in the market."