Alternative Market Producers' Forum Sheds Bright Light on Insurance Industry's Future.

PHILADELPHIA--(BUSINESS WIRE)--Oct. 15, 1996--In the game of life, this corporate competition is like so many others: the old guard is fiercely defending its turf from a youthful, but savvy, team of risk-takers.

But this contest is unusual because the players, and the customers, both have so much at stake. What's at issue here, quite simply, is whether the traditional insurance industry can weather the gales of changes blowing its way and stay afloat in a world in which one-size insurance packages don't fit all.

During the last decade, businesses have begun demanding insurance that's tailored to their needs, their risks, their history. To gain this customized packaging, corporate clients have moved from insuring risk to financing risk, and from purchasing insurance to making investments specifically set up to pay off claims.

As a result, the traditional commercial casualty market now has begun facing its own 100 year-storm, an innovative sector that's called The Alternative Market. In this arena, customers basically self-insure, in full or part, by forming investment vehicles such as captives, IPCs (Insurance Profit Centers) (rent-a-captives). Depending upon which expert you cite, this sector of the market, which underwent a dramatic growth spurt in the 1980s, already accounts for 40 to 43 percent of the corporate property and casualty market, which translates into $60 billion to $100 billion annually.

The competition raging between the old guard and Team Alternative is recasting an old reliable industry and sparking growth among specialty companies that manage worker's compensation costs, and other risks, in the same way that HMOs manage health-care costs.

In short, an old industry has a whole new order. Customers are becoming financiers, and in cases, are participating in the return of the underwriting profit and investment income that the insurers once earned. Brokers are getting involved in risk assumption. And Wall Street investors are jumping in a big way with a fistful of dollars to assume risk, and partake of the profits.

Ready or not, change has come. Brokers such as Nicholas P. James, of Johnson & Higgins in Miami, are relearning their jobs, which have shifted from sales into the complex, more complicated arena of high-finance and customer service.

"Everyone's learning," says James, who describes himself as a person who's growing in the industry, and a person who helps to educate others who are running businesses to grow with the industry.

"You've got to stay ahead of the game, or else you die. You are going to get crushed." James recently took his own destiny into his hands by attending The First Annual Producers' Forum sponsored jointly by Commonwealth Risk, a leading player in The Alternative Market, and by the International Business Forum of New York.

The seminar, which attracted nearly 200 people including industry leaders, brokers, and officials at specialty firms, was designed to help brokers navigate the sea of high-finance techniques and tax strategies that have become woven into their lives, and their jobs.

The insurance industry is changing daily, said John Kessock Jr., the home-grown Pennsylvanian who is now chairman of Philadelphia-based Commonwealth Risk.

"In today's market, we see three types of producers. Producers who make things happen. Producers who watch things happen. And producers who wake up one day and ask, 'What happened?'"

Candid talk, but then this is an industry where bad times and soft prices have hung around so long, people think of them as usual fare. The up-and-down cycle of the past has been one continual down cycle.

"This industry was dead-in-the-water," says Michael Lewis, an analyst with Dean Witter Reynolds. "When you look at the dynamics of the insurance industry, there really weren't very many dynamics. There was slow premium growth, the industry was very, very competitive and they were very, very costly in their operations. They weren't getting their product across on a low-cost basis."

"But, the answer to the industry's problems," he said to producers at the forum, "could very well be in the alternative market."

"The alternative market is alive, and well, and its prospering, even in the soft market environment," said Lewis, a senior analyst who follows the industry.

"But I don't want you to take my word for it. Take the stock market's word for it. Actions speak louder than words. The market is paying for the Alternative Market's future.... Even in a soft market environment, what the stock market is saying now, is that the future of this sector is bright because it provides the answers to business' insurance needs."

Self-insurance vehicles offer exactly what bottom-line minded CEOs have been demanding in the turbulent down-sizing environment of the 90s: cost management. Such programs provide firms with an opportunity to finance their risks, manage their costs and lower their net costs of insurance by returning underwriting profit and investment income.

Commonwealth Risk, a wholly-owned subsidiary of Mutual Risk Management, is an alternative market leader, providing an array of vehicles for insureds such as Insurance-Profit-Centers (rent-a- captives). IPCs allow smaller insureds to collectively receive financial benefits usually reserved for only larger accounts; namely, unbundled services, access to managed care and the return of underwriting profit and investment income.

The latest trend in the Alternative Market, Forum participants learned, is called Program Business. This concept spreads out risk differently, and profits too. And it allows brokers, in an environment where commissions are flagging, to assume risk and earn part of the profits resulting in hefty boosts to revenues.

Kathryn J. McIntyre, publisher/editorial director of Business Insurance, a respected trade magazine based in Chicago, sums up the differences between the old guard and the new guys on the insurance industry's financial block in this way:

"Often the conventional insurance market is the horse and buggy or sailing ship of travel. It will get the job done, but it takes too much time and costs too much -- too much time to negotiate the coverage and too much money for the value delivered."

CONTACT: Lisa Fleishman-Hicks of Commonwealth Risk Services,

215-963-1609