Consider the Alternatives

As the hard insurance market persists, risk managers and their CFOs are turning to alternative tools to keep steep premiums at bay.

An industrial gas company is a different beast than a chemical company. Lately Richard Inserra, assistant treasurer and director of risk management for Praxair Inc. in Danbury, Conn., has been explaining the implications of that distinction to the $5 billion industrial gas company's underwriters. "As an organization, we fall under the chemical category," he says, "but we're not a chemical company." In these discussions and in Praxair's applications, Inserra carefully lays out the risk-reduction techniques the company uses. "That seems to be working well so far," he notes. His premium increases are closer to 20 percent than to the 100 percent-plus rises that afflict many businesses.

As the hard insurance market persists, discussions about how to reduce towering premiums are percolating in executive suites everywhere. A Munich-American RiskPartners survey of 1,267 CFOs and risk managers found that the ongoing hard market remains the focal point of most risk-management functions (see Alternative Tool Kits on page 34). Nearly three-quarters of respondents identified price of coverage as a critical challenge, and nearly half cited issues surrounding coverage terms as a primary focus. "The hardening market issues that we saw in the 2001 survey have significantly intensified over the course of the past year," says Anthony J. Kuczinski, president of Munich-American RiskPartners.

In hard insurance markets, discussions of "alternatives" always crop up. In practice, though, alternatives tend not to translate into quick fixes. In some cases, they're not even optional. "Increasing deductibles are something that the insurance companies are demanding," says Brian Duke, vice president of Marsh USA Inc. in Austin, Texas. "I wouldn't say that clients have a choice in many cases."

The term "coping mechanisms" provides a more accurate characterization of the tools and tactics companies employ to help soften the blow of rising costs and, in some cases, decreasing coverage. Coping mechanisms in widespread practice today include absorbing more risk, strengthening safety and engineering programs, expanding the use of captives, spending more time making a case in front of underwriters, and switching insurers.