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Trends in insurance - 1990.

Trends in Insurance--1990 As we begin the next decade, we can look back on a decade of tremendous change for the insurance industry. However, as we look ahead toward the 1990s, even greater changes will significantly affect the types of insurance and the methods of providing them.

One of the primary characteristics of the 1990s will be a more sophisticated insurance buyer. As insurance companies continue to retreat from their traditional rule of bearing risk, this sophisticated buyer will demand more alternative risk-bearing products. Corporations will begin assuming higher risk retentions and will place greater emphasis on preventing losses.

The insurance broker's role in this scenario will be to meet the challenge of the sophisticated insurance buyer and to provide much of the driving force behind greater sophistication.

The new insurance players

Although the U.S. Department of Labor estimates that the number of people working in the insurance industry will grow during the next five years, these employees will probably be working for fewer, larger companies. Mergers and acquisitions of well-known national firms are becoming commonplace.

A less well-known activity is the growth in strategic alliances among smaller regional firms, enabling them to compete more successfully and to reduce operating expenses. This tactic may slow the selling off of small insurance companies that have been prevalent in recent years. However, from service and technological standpoints, smaller companies still face the prospect of falling farther behind.

The entrance of banks and other financially based organizations into the insurance business will create keen competition for traditional insurers. However, success in the commercial insurance sector during the 1990s will still depend on proper servicing of accounts and on a quick response to changing market conditions.

Direct writers of insurance will also continue to be a formidable force in certain market segments. Captive insurance companies gained significant attention during the last insurance crisis, when companies unable to purchase insurance established their own company or association to assume risks. These captive insurance companies will be tempted with the prospect of increasing capital and premiums by taking additional risks from non-group members. This increased capacity may spell trouble if the captives do not preserve sufficient funds to pay future losses.

As more insurance buyers gain risk management sophistication, the concept of a "Charles Schwab & Company" discount insurance approach may become more attractive. Without the need for historic risk trends analysis and the identification of areas requiring additional attention, sophisticated risk managers may expect to pay solely for the basic design of the insurance, not for service. Many larger insurance buyers are already staffed to take advantage of such an approach.

The trend toward

alternative insurance

Self-insurance plays a role in virtually every insurance program, from basic deductibles in property policies to the formation of captives.

Until a few years ago, most companies looked to the insurance industry for the bulk of their risk transfer. The insurance industry did not always justify this faith, however. The cyclical nature of the industry resulted in significant premium swings, deterioration of coverage terminology, and requirements to participate more extensively in assuming loss exposure.

With each tightening of the market, more aggressive insurance buyers opted for solutions that relied less on traditional insurance companies and more on alternative financing programs. The advantages of greater self-insurance include greater flexibility, price stability, and increased cash flow. The principal drawback to self-insurance is the increase in administrative costs for the organization.

With the emphasis on alternative-funding techniques, a whole new set of financing transactions will be required. The use of the capital markets for pre-and post-loss financial arrangements will be more critical due to the ever-changing nature of the risks faced by all organizations.

Post-loss financing first came into importance with the fire at Las Vegas' MGM Grand Hotel in the early 1980s. The lack of adequate insurance to cover expected liability claims and the extended period of time that would be needed to settle claims allowed the corporation to sell its future uninsured liability to an insurer for an actuarially determined amount of up-front cash. The insurance company expected to have the use of those funds for a period of five to seven years while claims were being litigated.

Such post-loss financing is still available and may be structured like the MGM deal or as an annuity policy purchased to fund a future stream of claims. More large claims are being set up on structured settlements to ensure that victims do not squander a larger lump-sum settlement. If this trend continues, post-loss funding will become more prominent.

Investment bankers recognize that organizations are willing to accept more exposure on their own. Bankers may often be willing to offer a prearranged line of credit that will be available to pay claims with repayment guaranteed over three to five years. Through the utilization of letters of credit, a policy may be used for a face amount that is in fact backed by nothing more than a promise to repay in the event a claim occurs.

While many of today's alternative risk-funding mechanisms will be part of the mainstream in the 1990s, it is doubtful that the traditional insurance broker or provider will represent this market. This is not to say that brokers will not respond to the alternative risk market.

The activities of risk purchasing groups sponsored by brokers are in the vanguard of a new series of risk-bearing facilities being promoted by brokers. Regional pools with such coverage as workers compensation, stop loss, and other primary and excess casually coverage will probably begin to appear, cosponsored by brokers and insurance companies. Such items as letters of credit, financial guarantees, and other credit-related risks will be a new area for traditional brokers to exploit.

The role of traditional insurance

The concept of relying less on insurance companies is appealing to many. The reality, however, is that traditional sources of insurance will continue to play a major role in the risk transfer programs of most properties.

When a $50 million building can be insured for a premium that costs less than $.05 per $100 of value, it does not make economic sense to attempt self-insurance. Transferring the catastrophic risk should always be the basis of insurance purchasing decisions. Managers should not gamble a great deal to save a little.

At the same time there is no predicted end in the cyclical nature of the insurance business. Natural disasters such as hurricane Hugo or the San Francisco earthquake give a significant jolt to the profitability of the industry and may result in increased prices. Extensive claims surrounding asbestos and pollution liability have also caught the insurance companies unawares. Some insurers may also be forced out of business by extensive claims, causing higher prices at other companies.

We expect coverages to become more restrictive as society continues to make larger and more far-reaching liability claims. Managers will continue to experience more difficulty allocating liability than property risks. New coverages will inevitably be introduced to meet new exposures, but these coverages may be developed outside the insurance companies. Conservative risk taking, adequate surplus, and a constant rate of return will characterize the goals of the insurance industry in the 1990s.

Services of the 1990s

The trend toward self-insurance in the decade ahead will produce new demand for different types of insurance service. Insurance buyers will require expert help in performing feasibility studies to evaluate the prospects of some types of self-funding programs.

Firms without in-'ouse risk consultants will also look to outside sources for assistance in the formation and management of group-purchasing programs, risk-retention groups, and captives. Claims management for self-insured programs may also be contracted with third-party vendors. Outside experts may be employed to assist companies in implementing computerized programs to assess and manage risk. Consultants may also be valuable in developing emergency plans for properties and for management businesses.


The increased complexity of the 1990s is inevitable. The regulatory environment surrounding insurance and the continually changing social forces will ultimately affect how insurance business is conducted worldwide.

The successful broker of the future will recognize that insurance has become a business of professional service, not just the transfer of risk. The mind set of the future must be to select not just the best insurance solution, but the best risk management solution. This is an area where the majority of brokers have not responded well. Brokers must expand their knowledge of specialized areas as well as develop more extensive outside resources to offer the range of services sophisticated buyers will require.

Those buyers who turned toward self-insurance in the 1980s will not return to traditional insurance in the 1990s. The freedom from the insurance industry is often exhilarating. For the majority of insurance buyers, maximizing the assumption of risk is highly recommended. Higher deductibles, retrospectively rated programs, and participation in association-sponsored groups and pools will benefit the property manager in the long run.

Insurance management and risk management will play a more critical role in the property manager's scope of duties in the next decade. Working with your insurance advisor to analyze the many options available should result in a comprehensive and highly cost-effective program for the exposures we all face.

Mark Charron, CPCU, is executive vice president of Betterley Risk Consultants, Inc., an independent risk management consulting firm in Worcester, Massachusetts. Mr. Charron specializes in risk analysis and insurance program design. He is the column coordinator for JPM's "Insurance Insights" column.
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Author:Charron, Mark
Publication:Journal of Property Management
Date:Jan 1, 1990
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