Without going into proprietary details, she obviously was having trouble getting competitive—or perhaps any—proposals that met the loan covenants. In addition, once the Best bridge was crossed, there were the S&P and Moody's thresholds to face. But at that point she was only trying to get past A.M. Best.

Her company's financial partners didn't seem to understand just how difficult meeting such covenants had become.

           I didn't have an answer, although I'm sure the information is available from these rating sources for a fee. The best I could do was let her know that at year-end 2002, there were 332 A-or-better individual companies or consolidated member companies. There also were 332 units with a financial size of VIII ($100 million to $250 million in adjusted policyholders' surplus) or more.

But of course they weren't the same 332 companies. And not all of them would write large property. And even those that would write large property might not be interested in her particular account.

Although I couldn't help this risk manager with her dilemma, her question did make me think once again about just how difficult it can be to meet loan covenant criteria, regardless of which line of insurance is involved.

Even when external forces don't dictate specific financial standards for insurers, most risk managers are keenly aware of the importance of solid financial footing for their insurers.

When loan covenants state a threshold, however, there's usually no way to make a business decision to accept, say, an A-minus insurer when a straight A-rated carrier isn't willing to write the business.

In the past, risk managers and their corporation's financial partners sometimes could be convinced to accept a cut-through endorsement to a reinsurer when a primary insurer was financially borderline. (Policyholders typically do not have direct access to reinsurers in the event the primary insurance company goes under.)

Even that took a lot of convincing of both the financial partner and the reinsurer.

Today such an approach might not be acceptable given the shaky ground (or even the talk of shaky ground) on which some reinsurers stand.

According to a study by Oxford Metrica, an independent strategic adviser on risk, value, reputation, and governance, there were 16 downgrades and no upgrades in insurer ratings in the four months prior to the end of June. There had been 42 downgrades and 10 upgrades in the previous 16 months.

Only two carriers—AIG as an insurer and Berkshire Hathaway as a reinsurer—had retained their AAA S&P ratings.

Oxford Metrica attributes the downward trend to long-tail liabilities, primarily asbestos and employment-related issues. Mold is noted as another potentially serious latent liability for insurers.

Standard & Poor's reinforces this information in an August report, which posits that larger, more established reinsurers may be less able to move out of unprofitable business as quickly as the less established Bermuda reinsurers.

Regardless of the why, using reinsurance to back up a financially borderline company may not be a viable solution. Meanwhile, issues with reinsurers, the downward trend of so many primary insurers, industry consolidations, and a general increase in rates are making the lives of risk managers all the more challenging.

Competition long has been the mainstay of corporate life, with competition among brokers and insurers on major accounts serving to temper pricing increases and broaden coverage. If the number of viable competitors continues to dwindle, what happens to the risk manager's ability to negotiate fair pricing for good coverage?

So I decided to do a little historical fact checking. Let me point out that my findings are just a quick, practical attempt to put a face on the types of problems many risk managers are facing today.

In the area of large property, let's take a look at the Factory Mutual system. According to A.M. Best, during the1900s the FM system consolidated from the original 40 companies to three members as of mid-1999.

At that time the three—Allendale Mutual, Arkwright Mutual, and Protection Mutual—merged into one, the current Factory Mutual Insurance Company (FM Global).

I can remember when we would entertain quotations from the likes of Allendale and Arkwright, as well as IRI, Kemper, and other HPR-type property insurers on the same account.

Not so any more.

Kemper ceased writing HPR property more than five years ago. And now, for all intents and purposes, it's discontinued writing any property and casualty insurance.

Risk managers who counted on Kemper as recently as last year, when its first downgrading (to A- by Best and to parallel lower ratings by other services) occurred, have lost the company as a potential insurer. It's interesting to note that Kemper consistently was A-rated until its mid-2002 downgrades, only to fall to D (poor) in 2003.

Although it's impossible to chronicle every such downward spiral, it is interesting to look at the cumulative effect that consolidation and financial problems have had on the industry.

In reviewing data promulgated by A.M. Best, in 1998 there were 381 A-rated or better “rating units” among a total of 2,077. Rating units are either individual insurers or their consolidated member companies, as compared to individual companies. There were 362 rating units size VIII or more.

The next year, A-rated and better numbers had dropped to 355 out of the 1,996 units measured. The member companies were larger, probably because of consolidations, with 373 size VIII or more. In 1998, 29 companies were under regulatory supervision or in liquidation. In 1999, 17 companies were in that category.

By 2000, there were 354 A-rated consolidated member companies; by 2001, 351; and, by 2002, 332. The number of size VIII or larger units dropped from 343 in both 2000 and 2001 to the 332 of 2002.

           What must be of particular interest to risk managers, however, is not the mere recitation of total numbers but the fact that, among all of these, many of the higher rated carriers and groups are regional players or insurers that write limited types of coverage.

           In paging through the current A.M. Best Insurance Reports volume, I had to go through a good number of pages before finding even one that met the loan covenant criteria of my friend and also professed writings of property insurance.

           This points to a continual decrease in competition that, granted, may be balanced to an extent by the formation of new insurers and alternative risk arrangements. Unfortunately, financial partners may not accept coverage written by such providers.

           Most risk managers I know have to balance cost-effectiveness with the financial security of the insurers they use. Unfortunately, as competition decreases, their job will only get tougher.