Selling in a Tight Market.

The alternative market offers innovative options for agents and brokers, who face challenges in finding products and services for cost-conscious clients.

Today's insurance environment is unsettling for many agents and brokers. After an extraordinarily long soft-market cycle, the insurance market has hardened, with reinsurers mandating increases across the board and underwriters finally pricing coverages more realistically. There is even some fear of an availability and affordability crisis in property/casualty lines.

When we add to this hardening market the overall economic slowdown in which companies are seeking to lower costs, it's fair to say that agents and brokers will face new selling challenges in the months and years ahead. Specifically, they will be challenged to sell innovative insurance solutions, instead of guaranteed cost policies or what has been otherwise considered "cheap insurance."

To meet this challenge, agents and brokers must recognize the benefits of moving away from the traditional approach and capitalizing on the strategic advantages in the alternative market. This market refers to alternative risk-financing products, which--unlike traditional insurance policies--involve some assumption of risk by the insured. The alternative market has grown in sophistication and popularity over the last three decades, and now it comprises more than one-third of the U.S. commercial property/casualty market.

For agents and brokers, alternative risk financing involves a different mindset. Unlike the rate volatility, total risk transfer and bundled service packages of the traditional market, the alternative market involves risk assumption, control, rate stability and profit participation. In fact, there is considerable flexibility for agents and brokers in a hard market, but they will need to know about the alternative risk-financing opportunities available. Their success rests on their ability to remain aware of industry nuances and to educate their clients about them.

Three alternative risk-financing vehicles are the most popular:

* Self-insurance is an arrangement in which an organization intentionally retains at least a portion of an identified risk. This arrangement can be managed internally with the addition of new staff and reporting systems, but it is often handled by an outside manager. The self-insured maintains the loss reserves, and so it has full use and directive of those funds, while maximizing cash-flow benefits. In addition, self-insurance reduces the overall cost of insurance, creates less dependency on the commercial-insurance market and improves claims management and loss-control procedures.

* Captives have grown tremendously since the mid-1970s as a proven approach for larger entities to address exposure to risk. This is particularly true for those insureds that take a long-term perspective on how to best meet their risk-management needs. Captive insurance companies that select offshore domiciles can offer tax advantages, while all captives offer lower transaction costs and administrative expense, as well as access to underwriting profit and investment income.

* Rent-a-captives offer middle-market customers many of the same benefits that captives do--without the start-up administrative costs, capitalization requirements and legal issues.

Large deductible programs also have become popular alternatives that enable insureds to retain the predictable, working tier of risk and transfer the large catastrophic exposure to the insurer. In recent years, the middle market had moved away from these deductible plans to lower, guaranteed-cost options available in the soft market. But hardening of prices opens up new selling opportunities for those who want to take advantage of these cost-effective options. The alternative market can offer more flexible, deductible structures than are provided by the standard deductible plan in the traditional market.

Also, discerning agents and brokers can find selling opportunities in the alternative market to leverage their experience on a controlled book of business, in which they also can participate in a risk/reward program. By structuring a select group of preferred risks in their book and by participating in a portion of the group's unfunded exposure, an agency gains an economic incentive to provide superior client service. By being proactive on loss control and claims management, there is more frequent agency/client contact and faster claims resolution resulting in reduced claims costs.

As agents and brokers navigate double-digit price increases, reduced availability and more stringent underwriting requirements, they can look to the alternative market to give customers more than insurance--they can give them financial solutions to insurance problems.

Richard G. Turner is president of Commonwealth Risk Services LP, Philadelphia, a subsidiary of Mutual Risk Management, a provider of alternative risk-financing services.