Cost of Risk Increases.

For the first time in six years, flat premiums and substantially higher retained losses have driven the average cost of risk in the United States upward. This is the finding of a recent study by the Risk and Insurance Management Society Inc. and Ernst & Young, both based in New York.

After reaching a low of $5.25 in 1997, the average cost of risk rose to $5.71 in 1998. This change corresponds with the change in overall operating ratio for commercial insurers, which declined steadily over the past few years.

Higher retained liability losses--general, auto, umbrella, products, professional, errors and omissions, directors' and officers', pollution/environmental, and employment liability--have increased dramatically, from $1.l7 in 1997 to $1.62 in 1998. Overall, liability costs per $1,000 of revenue increased from $1.93 in 1997 to $2.43 in 1998. Average liability premiums were roughly flat, increasing from 76 cents in 1997 to 79 cents in 1998.

"There are simply years when you have good losses and there are other years when unfortunately, your experience is not that good," explains Sue Anne Mitro, vice chair of the RIMS research committee. "And it appears for a lot of companies that it was a year that they had liability losses that were significant enough to impact the cost of risks."

In addition to an increase in the cost of risk, there was a shift of risk to insurance carriers as a result of the soft market, in which companies bought guaranteed cost programs at a low rate. For instance, there was a 13 percent increase in the purchase of guaranteed cost for general liability, a 4 percent increase for workers' comp, and a 10 percent increase for auto liability.