So where does this leave the traditional market today?

If the hard market allows insurance companies to replenish capital with premium increases, but the majority of policyholders elect to self insure, take large retentions, start captives, or transfer only the catastrophic or aggregate risk to the markets, who will be left to pay the price increases?

Who will be left to make up the cumulative effects of large toxic torts like asbestosis, mold, Sept. 11, 2001, cash flow underwriting, recent poor capital gains, an unbalanced civil justice process, investor unrest and the threat of war?

I contend, there are not enough policyholders to make up for these shortfalls.

So what happens when recent pricing increases begin to moderate, or, as history often tells, the hard market exits as fast as it arrived?

We have witnessed and we will continue to see large, well-known, national insurance companies suffer significant downgrades from insurance rating agencies.

We've seen carriers withdraw from entire lines of business or geographies, enter rehabilitation, or implement an exit strategy at a record pace in 2002. I expect 2003 to see even more.

This is a matter of such concern that a recent survey of top U.S. producers by the Council of Insurance Agents and Brokers revealed that about 86 percent of those surveyed expressed concern about insurer insolvency.

That same survey found that brokers and agents are increasingly looking to use alternatives, like captives, to place business.

Despite getting 20-to-50 percent or more in premium increases from their policyholders over the past few yearsstill a bargain if you believe some of the pundits comparing 2002 to 1993 problems are not over for insurers confronting and dealing with the issues of reserve deficiencies.

Besides the observation that the cost of capital in 2002 was never close to being covered by a comparable return-on-equity for the property-casualty industry as a whole, for some carriers the choice to replenish capital comes at the cost of other strategic growth plans, namely client-building activities.

For example, employees are not added to manage the increase in new business activity, or a client retention program may be forgotten in the rush to write new business or shed unprofitable lines or risks.

Anybody in the business will tell you they are getting their quotes closer and closer to the date of renewal or expiration. And if you have been in any underwriters office lately you will note that the Greek architecture resembling columns is not intentionalthese are stacks of submissions that have yet to be seen.

So what does this mean for the traditional carriers versus the ART market in the next few years?

Because of the ever-increasing numbers of insurance and reinsurance firms having to allocate capital to reserves to cover mounting losses, they may lose sight of what got them in business in the first placetheir clients' loyalty.

Clients who for years have been with one or two carriers because of good communication, trust and mutual benefit are now lost to the ART market. Without insurance companies willing to maintain those valuable relationships by allocating capital to relationship-building practices, clients will go to those markets that can best manage their needs and encourage a partnership.

This means that the traditional market, which depends on large numbers of policyholders to spread the risk among good and poor risks, may be resolved to retaining a disproportionate number of poor risks that cant afford to go to the ART market, or at the very least, a smaller number of clients from which to spread risk.

This means that the higher premiums needed to sustain a companys profitability will be allocated to fewer and fewer policyholders. At the same time, the properly managed and astute ART client is funding anticipated losses and moving away from ever having to go back to being treated poorly by the insurance markets.

Not understanding this could leave certain carriers exposed to a larger adverse risk poolbecause the only available customers left will be those who will pay the higher premiums but lack the risk management discipline to control risk.

The result of not being able to spread individual risk to large numbers of similar risks will result in a further consolidation of the traditional insurance markets.

If this is the case, it could mean yet another period of instability and inconsistency within the ranks of the insurance world via consolidations, bankruptcies or withdrawal of certain lines of business.

Given this scenario, where would you rather place your riskin the traditional market or, given a choice, the ART market where you can at least try to control your insurance programs potential?

Christopher L. Kramer is vice president, professional liability, alternative risk management for Neace Lukens in Beachwood, Ohio.

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.