On the property side, the news is better than in the casualty market. After 9/11, significant new capacity was added with the creation of several Bermuda-based insurance companies. Eventually, that translated into increased competition, more leverage for corporate clients and better premium prices. "We haven't seen an increase in property insurance in months," says Suzanne Douglass, managing director of the North American property practice at Willis Group Holdings Ltd. in New York. "In the case of some very large accounts that were hit hard by 9/11, they are now starting to see some substantial premium reductions. The new Bermuda insurance companies are asserting themselves in the marketplace. Meanwhile, the old guard property markets are arranging reinsurance treaty support to commit more capacity and compete more effectively."

The numbers from fourth quarter 2003 renewals tell the story: A survey of commercial insurance buyers by the Risk and Insurance Management Society (RIMS), a professional society of risk managers, indicates property premiums fell 8.8% between October 2003 and the end of the year. By contrast, premiums for most casualty coverages continued to rise, with increases in the 10% to 12% range being the norm. "Much of the commercial property insurance segment is now realizing an adequate rate of return," explains Robert Hartwig, chief economist of the New York-based Insurance Information Institute (III). "Since the underlying loss trends are not that bad, they're willing to put an end to the large property premium increases, and in many cases actually lower them."

Hard-nosed carriers are also willing to dicker again. "They are not giving away the store just to get the business," Willis' Douglass explains. "On the other hand, they are willing to sit down and negotiate terms and conditions. Whereas they may have held back something like contingent business interruption coverage last renewal, they will discuss putting it back this renewal. There is room for negotiation."

If the property market could be categorized as half-full, then certainly the liability market is half-empty. In this sector, risk managers still face increases, although admittedly much more restrained than anything they were offered in 2003 or 2002. "Generally, most companies are seeing an increase in their general liability policies in 2004, typically in the high single digits," Hartwig says. "But that is good news, since it wasn't long ago when 20% to 30% increases were the norm."

Up But Not Out of Sight

For example, Caesars' Ewing expects his general liability premium to rise slightly come the renewal of his policy in June, "but nothing like a skyrocket," he says. "Our loss ratio has been flat, and our in-house claims handling department has done an outstanding job giving our underwriters, Zurich Insurance Group, a high comfort level. Zurich also has really stepped to the plate to learn our industry and business."

But coverage terms and conditions in liability policies have been tightening considerably with three years of corporate scandals, skyrocketing health care costs and a burgeoning number of costly lawsuits, and no one expects that noose to loosen anytime soon. "We've seen rate increases come down and even some softening on casualty renewals, but terms and conditions are hard," says Craig Simon, managing director and national casualty practice leader at Willis. "Underwriters in the past soft market offered loose terms like guaranteed first dollar loss coverage [with no deductible], whereas deductibles are now the norm. The wording of contracts also is stricter, particularly with respect to pollution liability."

Tim Brady, a managing director at Marsh Inc., notes that underwriters are not demanding higher risk retentions per se. "The real dynamic is price," he explains. "Many risk managers are raising their deductibles to lower their premiums. If they had a $100,000 retention last renewal, it is likely to be $200,000 in the current renewal. It becomes painfully obvious that the best way to moderate price is to hike the retention."

Here is a look at the troubled areas of coverage in liability:

Directors and Officers Liability Insurance. First and foremost, there is the continuing news on executive misdeeds, from Bernie Ebbers to Dennis Koslowski to Martha Stewart, and on company scandals from Parmalat to Royal Dutch Shell that make D&O "a house on fire," as Hartwig puts it.

D&O market leader American International Group Inc. agrees the line has a long way to go before it is truly stable. "The sheer quantity of D&O lawsuits in a given year is up 40% to 60% compared with pre-1996 levels, while the costs of these claims are multiples of what they used to be," attests Gregory Flood, chief operating officer at National Union, an AIG company. "Earnings restatements are a major reason for the suits, up 27% last year alone. Meanwhile, the industry is coping with mutual funds under investigation by regulators, and we haven't even seen all the final damages and fallout from WorldCom, Enron, Adelphia and other headline grabbing names."

The D&O Headache

Despite the flood of bad news and class actions, D&O premium increases have actually begun to stabilize. A recent survey of the D&O market by consulting firm Tillinghast Towers Perrin indicates that the percentage increases are declining, says Amy Bouska, Tillinghast's property/casualty insurance practice leader in North America. "From the buyer's perspective, things seem to be getting worse slower." Bouska also points out that not all D&O buyers are "being hammered. The D&O market is clearly selective in the sense of who gets a big rate increase and who doesn't."

The D&O softening is "counterintuitive," notes Carol Zacharias, senior vice president and underwriting counsel for New York-based Ace USA Professional Risk, given the current business news climate. "Frankly, most people were surprised at how short the hard part of the market has been," she says. "You still have enormous cases out there that are yet to be settled." The reason, Zacharias explains, is "competitors in the market looking to maintain book or gain a book. There are new entrants looking to make their mark."

Meanwhile, the insurance industry has been putting its heavy lobbying guns behind efforts to slow down the flood of class actions through legislation. But even insurers are doubtful that federal tort reform is in the cards during a presidential election year. "It would be wonderful, but anyone who counts on it or expects it to happen is engaging in wishful thinking," says Steven Pozzi, chief underwriting officer of commercial insurance and a senior vice president at Warren, N.J.-based insurer Chubb & Son Inc. "While some states have enacted tort reforms, this has actually made it harder to underwrite multistate companies. If one state has one liability regime and another state has another regime, it makes it harder to underwrite the business. We need across-the-board reform, but it is not likely soon."

Fiduciary Liability. According to Caesars' Ewing, fiduciary liability is the insurance issue keeping risk managers up most at night these days. The implosion of the Enron 401(k) and the underfunding of many U.S. pension plans has put increasing pressure on fiduciary liability insurance, which protects plan sponsors against employee claims against retirement programs. The recent RIMS survey indicates annualized fiduciary liability rates were up 67% in 2003 from the previous year. As for this year, since neither issue–the underfunding or the scandals–is settled, Hartwig says to expect increases in the 50% range. Ewing comments that "underwriters are looking to get closer to what is going on in companies, which is compelling risk managers to be sure their corporations have appropriate protocols in place. With the mutual fund scandals of late, this could become the next D&O."

While it could, it hasn't–despite what might be presumed from the steep premium hikes with which some companies have had to contend. "I've been waiting for fiduciary to heat up for the past three years–ever since Enron," Ace's Zacharias says. "But while ERISA claims have been filed, it hasn't been the sweeping tsunami many expected."

Employment Practices Liability Insurance. This coverage protects against employee litigation brought for sexual harassment, hiring discrimination and job termination causes, and has become another problematic line in recent months. "I've noticed a shrinking in the number of carriers willing to write the business, while the carriers that remain, in terms of the background information they want from you for underwriting purposes, are akin to IRS auditors," says Ewing. "My colleagues in the risk management profession are taking sizable or increased deductibles, lowering their limits or putting certain exclusions in their policies to lower the premium." Hartwig concurs: "Increases in the 15% to 20% range seemed to be the norm in fourth quarter 2003. Anecdotally, I've heard of companies scaling back in EPLI. It's a tough market now made worse by the sour job market. Many people are losing their jobs and, given that few jobs are being created, they're more likely to sue."

Workers Compensation Insurance. This is a market that depends to a large degree on the state in which a company conducts business. Texas and California, where Gov. Arnold Schwarzenegger has made workers comp reform a chief administrative objective, are the truly tough states. North Dakota, on the other hand, is not, which is little comfort to the thousands of companies without employees in North Dakota. Still, all markets in all states are suffering from runaway medical care cost inflation, which Hartwig tags as the chief culprit in soaring workers comp premiums. "If you look at the statistics, health care costs as a percentage of the dollars paid from workers comp were 40% in 1982 and 53% in 2002," he explains. "Medical care inflation is now 12% to 15% a year, which has a substantial effect on workers comp premiums. Spiraling prescription drug costs and increased utilization of the system, particularly numerous visits to chiropractors, are a big part of the problem."

So are hospital stays, expensive surgeries and diagnostic tools like MRIs and CAT scans. Medical science has improved the likelihood that individuals will survive serious illnesses and diseases that, in years past, would have been fatal. That's great for workers, but less so for their employers. "The economic impact of improved medical care is wending its way through the workers compensation market," Marsh's Brady says. "While the frequency of claims is down in the market, the financial severity of claims is far higher. And that is driven in large part by health care costs."

What's more, because workers comp is a statutory system, a company cannot use the same tools it may use in a general health insurance context, such as deductibles and co-insurance, to stave off higher costs. "You can't put any costs on the actual end user, so there is no incentive [among employees] to reduce exposure to loss," Hartwig says.

For Ewing at Caesars, it has proved a headache. While Caesars' last workers comp policy renewals went well in most states, Nevada was a problem because of a high concentration of employees at its Las Vegas casino. "When you have a lot of employees in a single location, the risk of catastrophic loss gives underwriters pause," Ewing explains.

Preventive Actions

The rest of the property and casualty markets are a mixed bag. Commercial automobile insurance, particularly for hired and non-owned vehicles, continues to rise in cost and "underwriters are asking a lot more questions about how these risks are managed," Willis' Simon says. Premiums for excess casualty insurance, also called a commercial umbrella, are roughly 30% higher than they were a decade ago, with losses inflating at a near 14% annual rate, Bouska says. Ewing notes that marine insurance, both property and liability, shot up almost 20% this year, "presenting me with a somewhat more difficult renewal than I had expected," he says. The tough insurance market for cars and boats apparently does not apply to planes. "I've noticed a flattening out in aviation insurance protecting Caesars' corporate jets," he explains.

The tougher insurance market has prompted companies to improve their risk management: It's not just about negotiating a good contract; it is about making sure a company is doing everything it can to keep its incidence of claims down. For instance, Ewing's property conservation program at Caesars, which includes an early warning system for approaching hurricanes and tornadoes, is keeping his property insurance premiums in check. "Property underwriters are keenly interested in these kinds of risk reduction efforts," he comments. "But don't sandbag them. If you say you're going to do something and a year later you didn't get it done, they're not going to take too kindly to that."

Ironically, the insurance industry itself may be suffering from inadequate risk management and insufficient reserves. At the end of 2003, the industry's loss reserve deficiencies totaled $65 billion, and carriers have been downgraded because of it. Insurer rating agency A.M. Best Co. issued a record 188 rating downgrades against insurers in 2003 versus 57 upgrades. Over the last five years, Best has levied 623 downgrades versus 381 upgrades. Both numbers reflect continuing pressure on the capital adequacy of insurers. "Many companies haven't fully yet recognized their deficiencies," says Robert Farnum, senior financial analyst at A.M. Best. "While the good results of late are starting to go into insurers' surplus, it will be a long time coming before insurers put that money into their earned income."