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Marketing Multiple personalities Zurich supports multiline, multiyear programs By Michael J. Moody, MBA, ARM 2005 will long be remembered as one of the most devastating years on record for the insurance industry. It is the year that had more named storms than ever and more of them made landfall. Even though the property losses have still not been finalized, it appears to be the most costly on record. The full effect of these catastrophic events has not been completely absorbed by the industry, but what is known at this time is that the property market will begin to see meaningful price increases, especially in catastrophe-prone areas. As a result, additional capital has already begun to enter the market. Despite this new capital, alternative ways of utilizing the existing capital will need to be considered to maximize the industry’s existing capacity. One possible option that should receive increased attention is a concept that has been around for a number of years and had gained significant interest in the late 1990s. At that time, several carriers began offering an innovative insurance product known as integrated risk, or multiline, multiyear (ML/MY) programs. While these programs were basically born out of a desire by carriers to offer a more efficient approach to the traditional monoline coverage tower, they did gain interest and a number of programs still remain today. Pushing forward Several national carriers began offering the ML/MY products and for a number of years, and it appeared that insurance buyers would begin adopting them. However, as a result of 9/11, most insurers moved quickly back to their core business strategies and the ML/MY programs all but disappeared from the insurance market. However, one company, Zurich, has maintained its presence in the ML/MY arena. Through its Global Corporate Structured Solutions Group, Zurich continues to offer ML/MY programs, according to Matthew T. Hoefert, senior vice president. “We are alive and well and are continuing to support these programs,” says Hoefert, noting that Zurich “has executed more than 150 ML/MY transactions.” Further, he states that they have designed integrated ML/MY solutions for virtually every industry and type of exposure. He goes on to note, “We have no excluded industries, but rather look for good accounts that wish to develop a long-term relationship with their insurer.” The Structured Solutions Group, which was formerly known as Zurich Corporate Solutions, was formed in 1997 for the purpose of providing risk transfer and risk financing solutions for its corporate customers. One of the key reasons Zurich has succeeded in this marketplace is that it provided an inter-disciplinary team of professionals to handle these unique program structures. In addition to the traditional property and casualty specialists, Hoefert says, “The team includes management liability specialists, as well as our own actuarial, legal, capital markets and claims personnel. “We have a key group of people that has been working together on these programs for a long time, so we are able to respond quickly and comprehensively,” says Hoefert. Structural elements Zurich’s actual ML/MY product is quite similar to what they have been offering since the late 1990s. Structurally, the product is designed to cover a number of lines of coverage (two or more to qualify for the integrated program), which typically would include property, crime, casualty, errors & omission coverage, and executive risks (i.e., directors & officers liability, employment practices liability and fiduciary liability). And while the basic structure does not include nontraditional financial risk such as commodity price or currency exposure, Hoefert says, “We will consider nontraditional risks.” He does point out, however, that workers compensation coverage is not available as a coverage that can be included in the ML/MY product. The program can be written for a three-year policy period. This is rare today. While several other carriers do offer the multiline portion of the structure, few are willing to provide a multiyear policy. Not only is Zurich’s product a three-year deal, it is a three-year deal with a guaranteed rate, notes Hoefert. Currently the program provides a maximum $50 million event limit, a $100 million annual limit as well as a $150 million term limit. Should higher limits be required, excess policies can be placed over the integrated program to provide additional protection for specific coverage concerns. Excess property and/or liability coverages would be available and can be arranged. In addition, Hoefert says the program incorporates $40 million of embedded property capacity, which includes coverage for critical earthquake and windstorm exposures. Program advantages The integrated aspects of Zurich’s program allow an insured to include multiple lines of coverage for easy administration because only one policy is needed every three years, rather than the annual ritual of individual policy renewals. This approach also allows for a single event and annual policy limits. Rather than requiring the insured to buy separate coverage towers on a single transactional basis, the insured buys only a single aggregate limit, which would apply to a company’s portfolio of risks. This approach, says Hoefert, is a much more efficient use of insurance capacity since the catastrophic limits are spread across multiple lines of coverage. Another key feature of Zurich’s structured program is the basket aggregate protection that can be incorporated into the program. The basket aggregate protection extends across all lines of coverage, including workers compensation (even though it cannot be covered on a primary basis), and enables the insured to optimize the per-loss retention for maximum pricing advantage. The portfolio effect from including multiple, low-correlated lines of coverage can assist the insured in controlling the total amount of retained loss in a given period of time. Thus, Hoefert says, “It helps the insured manage retained loss volatility.” Zurich Structured Solutions Group’s clients range from Fortune 500 corporations to middle market companies seeking to solve a specific risk management problem. Hoefert points out that the business ranges from upper end national accounts to mid-sized risk management accounts. Most accounts are in the revenue range of $500 million to $10 billion. He also notes that they like to find accounts that desire a long-term partnership with its insurance provider. Ideally, the account will have a low correlation between various lines of coverage and be willing to consider an innovative perspective to their risk financing needs. When the ML/MY products of the late 1990s were introduced, some people believed that they could be used as a first step in the evolution towards a holistic approach to risk management. As time went on, some experts opined that the movement to enterprise risk management was a process not a product, and they saw little value to the ML/MY in the ERM evolution. However, with the passage of time and a clearer picture of the ultimate ERM approach, it would appear that companies may well decide to move to an integrated risk alternative as part of their overall holistic approach to risk management. Without question, the product has the ability to combine both traditional and nontraditional risks into a single product that can take advantage of a company’s natural hedging strategies, and the ML/MY product can provide the ideal sleep protection, should the company be a little aggressive in selecting their risk appetite. At the end of the day, the experts are correct; the movement to ERM is a process and not a product. There is little question about that. However, if an organization can avail itself of a product that can easily dovetail with its overall ERM strategy, it would be shameful to ignore it. Couple this with the fact that the ML/MY products provide a much better utilization of industry capacity and it may turn out that ML/MY products can provide a cost competitive environment as well. * |
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