Even though some coverage is tight, Mr. Mead stressed that RRGs and captives are not for everyone. “So a lot of people will be paying higher prices for traditional insurance, if they can get it. And some people are going to be storming the state capitols demanding help.”

He explained that regulators need to be creative and think of different approaches. “For instance, if you have a captive in Arizona, you can write your Arizona [workers'] comp. You can't do that in every domicile.” (Workers' comp can also be written by captives in Georgia and Hawaii, but not in other states.)

There are “still pockets where there are no problems” with coverage, he said, such as small manufacturing companies and small charitable foundations.” But, according to Mr. Mead, “anything that has to do with professional liability or workers' compensation is a huge problem.”

Where fronting is available, Kevin Doherty, president of the Georgia Captive association and a partner with Gladstone, Doherty & Associates in Nashville, Tenn., said most of his clients with captives are seeing 15 percent to 25 percent price increases from their reinsurers.

“Theyre usually not able to get reinsurance at the same attachment points and the same limits, especially in workers comp,” he said.

Many of his clients, he continued, are having to agree to caps on coverage because reinsurers “are not offering the full statuatory coverage that used to be the norm.”

Mr. Doherty continued that limits are going up and retentions are going up “dramatically.” For example, he said, a lot of his clients that had specific retentions of $250,000 have seen them raised to $500,000 or more, “which makes a big difference in your profitability,” he said.

Increased retentions means those organizations “must now cover the first half-million, instead of the first quarter-million for each individual occurrence,” he explained. The reinsurer doesnt step in until the claim reaches $500,000, “and very few claims get to that. However, a lot more claims get to the $250,000 level,” he said.

Clients are also being affected “at the top end,” he said. For example, workers comp is what they call statutory coverage, meaning that if a worker is injured on the job the employer is responsible for compensating the worker “indefinitely, theres no policy limit.” Reinsurers, however, are “putting a $20 million limit, or a $10 million limit on your entire workers comp portfolio,” which he added, “probably wont matter that much, but its really a question of if you can sleep at night.”

Even though it would be rare for those limits to be utilized, he added, “the reinsurers are not taking any chances.”

On top of this, he said, premium levels have gone up, “so youre paying more and getting less.”

The argument could be made, he said, that reinsurance was underpriced for several years and that a correction was due. “To an extent I think thats true,” he said, but “the biggest problem is the stock market. Its not 9-11. That was a problem, but I think its the stock market. Because if reinsurers cant earn from the stock market they have no choice.”

Mr. Doherty explained that while U.S. insurers are regulated and their investments restricted, some European reinsurers ultimately dont have the same restrictions, “so they can invest large sums of their portfolio diversely.”

Reinsurers that have been hit hardest in the stock market “are passing on the cost, theres no doubt,” he said. “But they were also passing on the savings and the benefits. Its a competitive market, so there are a lot of different ways to look at it.”

Lance Ewing, first vice president of the Risk and Insurance Management Society in New York, said, “This hard market is nothing like weve seen.” Mr. Ewing, executive director, risk management, for Park Place Entertainment in Las Vegas, Nev., said the market has seen adverse effects from both reinsurance and primary standpoints.

Though there are problems in the reinsurance market, he agreed that, “You cant lay everything at the feet of the Europeans. They were allowed to invest in equities and stocks that unfortunately didnt pan out. Anyone who is checking their 401(k) plans lately is seeing the same thing.”

Other factors in the mix adding to the unpredictability include impending wars, economics, layoffs, and directors and officers issues, he said.

“All the issues facing the risk management community are facing the carrier as well,” he said. “Ten or 15 years ago, no one would have thought Reliance would have gone out of business. No one would have thought Kemper would have the problems they currently have.”

(Kemper Insurance Companies, downgraded by several ratings agencies in recent weeks, sold off its group captives business to The Hartford, Old Reliance and Zurich North America Environmental.)

Mr. Ewing believes there was more stability during prior hard markets.

“Youll see more activity in the captive market, risk retention pooling, alternative risk financing programs, and [higher] deductibles or self-insured retentions,” he said, forecasting buyer reactions to high insurance rates and the lack of stability.

Insurance buyers are preparing their chief financial officers for the worst, asserting that many risk managers are going back to their CFOs and suggesting that the only options available to them are to raise deductibles or self-insured retentions.

(A self-insured retention differs from a deductible in that, with an SIR, the insured undertakes functions that normally would be performed by the insurer for losses within the SIR.)

Another way of dealing with the situation, he said, is to step up loss control and safety. However, “a lot of times, risk managers are faced with the fact that in these economic times, a lot of what gets cut is safety and loss prevention. Thats a battle that we have to face,” he said.

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.