Shopping around

The cost and availability of insurance continues to be of concern to risk managers according to those gathered in Rome last week for the Federation of European

Risk Management Associations (FERMA) conference.

But Marsh Europe president and chief executive Bill Malloy says that, while the insurance market in Europe is difficult, there is adequate capacity in most lines of business.

In the property classes, Malloy says capacity problems exist only in insuring against natural catastrophes for peak zones, and in specific industry classes and specific construction classes.

"The quality of the information is the key to the broader coverage. It's not an absence of capacity, it's there. The underwriters are being very careful about how they deploy it," he says. With regard to liability, Malloy says that Marsh estimates that ¤1.3bn of capacity is available in the European market. He says that in Europe only one in 20 businesses had experienced a loss greater than $US5m in the past five years, compared to one in 12 in the US.

Zurich North America president and chief executive John Amore, who also has responsibility for Zurich's global corporate business, says that while premiums in the casualty classes are still rising, property rates have "levelled off" in the UK and US. But Amore says that property rates are continuing to increase in continental Europe.

Narrow cover
However, a report into the state of the European property market by Aon, based on research undertaken in 11 European countries, says that property rates have peaked and, while still high, are on the verge of falling, with slight rate reductions evident in some sectors. But the report also says that cover remains narrow, with terms and conditions remaining tight.

In light of the high costs of insurance, European risk managers are more likely to consider buying insurance outside of their domestic markets, according to the Aon report. It says that large European companies traditionally rely on domestic insurers for their property cover, in part due to long-standing direct relationships.

However, respondents to Aon's survey say they are now more likely to look for alternative markets if they are unhappy with the terms or rates offered locally.

Lloyd's and the London market were listed as the preferred markets, ahead of Paris, Munich and Zurich. The report described the US and Bermuda as "some way behind" in terms of their popularity with European risk managers.

In terms of liability insurance, Marsh released a report at the conference suggesting that European companies are not buying enough. The report, Limits of Liability, surveyed 1,000 European companies.

It found that, on average, European firms bought 11% less liability insurance in 2003 when compared to 2002, down from an average of ¤55m to ¤49m. The survey also revealed that across the region, the average cost of liability insurance increased by 82%, from ¤8,339 to ¤15,196 per ¤1m of cover.

The report found that UK firms buy more liability insurance than the European average, buying an average of ¤67m in cover. Chemicals and pharmaceutical companies, and transportation businesses, buy the most cover. UK firms also pay less than their European counterparts, with an average price of ¤7,480 per ¤1m of cover, but this is due to higher levels of self insurance in the UK rather than lower rates, according to the report.

A managing director of placement services at Marsh, Guy Malyon, who edited the report, says that across Europe, businesses in the personal, business services, hotels and amusements sector only bought an average of ¤25m in liability cover and should look to increase their limits.

But Malyon says that appropriate limits are difficult to set, with several factors to consider including industry sector, size, markets and regions the company operates in and future claims inflation.

"We're setting limits now that have to pay for claims in five years' time," he says. Larger companies, with revenues in excess of $US10bn, ran counter to the trend by increasing their liability cover by 7% in 2003. But Malyon says that smaller firms should consider increasing their cover. "We would suggest that they should consider buying more," he says.

However, risk managers are also becoming more attracted to the idea of putting their liability risks into a captive, according to senior vice president of Marsh Management Services, Frederick Gabriel.

"More and more we are seeing workers compensation and employers' liability being put into captives," he says. With nearly 50% of risk managers planning to develop existing captives, Gabriel says the renewed interest in captives since 11 September has been sustained, despite upcoming changes to regulation, accounting standards and taxation affecting captives.

He says that captives are being used to house increasingly complex risks, due to the failure of insurers to develop new products, coupled with insurer and reinsurer credit downgrades. But he says that there were some indications that new products combining insurance and other types of financial products were being developed.

Industry pooling
"There's certainly a need for innovation and flexibility." Gabriel says that future developments in captives could involve more industry pooling and more direct writing captives. Risks that business could consider putting into their captives in future include corporate fraud, weather related risks, terrorism, product contamination and recall and future raw material prices.

Despite the current issues around rates, capacity and the market cycle, there was some good news for risk managers, with insurers saying that market cycles will not be as pronounced in the future.

John Amore, from Zurich, says an improvement in the quality of information supplied to insurers by businesses, coupled with better internal management and controls within insurance companies, would "moderate" market cycles.

Chief executive of Allianz Global Risks, Steve Schleisman, says that the more pronounced role of the ratings agencies in the insurance market would also lead to increased stability, as the ratings agencies would have a "much more moderating force on extreme competitive behaviour".

But Schleisman says the perception of a single market cycle is false. "There's multiple cycles for multiple products for multiple markets," he says.