Business Insurance Rates Going Through The Roof -Marsh

   Of DOW JONES NEWSWIRES

CHICAGO -- U.S. corporations looking to buy insurance coverage must face the fact that it's a sellers' market this year, risk consultants at Marsh Inc., a unit of Marsh & McLennan (MMC), said in a presentation here Tuesday.

A painful combination of trends and events, including reduced investment income from a weak U.S. equities market, higher costs due to the Sept. 11 attacks on the World Trade Center, the scandal at Enron Corp. (ENRNQ), and inflation in health care, mean that premiums on most types of business insurance are jumping as much as 300% higher in 2002.

Some insurance can't be acquired at any price, Marsh's insurance risk consultants said.

The industry's surplus funds for adding new policies have been severely depleted, and companies which let policies lapse may not be able to replace them, Marsh consultants warned.

Companies renewing policies this year should be prepared to give up some pieces of coverage they have enjoyed in the past. "It used to be that insurers offered 'throw-ins,' " added incentives for buying insurance, said Kevin Brogan, a specialist in risk for casualty policies. Now insurance carriers are including "throw-outs," things like business interruption coverage, that may have become too expensive to insure at any price.

In fact, said Manuel Ribot, Midwest Property Manager, companies need to be prepared for a "take it or leave it" attitude from underwriters.

Clients may also have to settle for shorter-term policies than in the past.

The threat of terrorism is a key driver for higher premiums on many types of policies, the consultants said. But the problem is so new that the industry has yet to come up with a working definition of what terrorism is. "We have 100 different kinds of terrorism," said Ribot. "No one knows how to define terrorism."

Premiums are going up fast in the property insurance arena, Ribot said, with 37% of renewals now coming in with premiums 100% higher or more. Much of that is due to the World Trade Center disaster, expected to cost the insurance industry a total of $50 billion in claims.

As for liability insurance for corporate officers and directors, premiums are up a minimum of 30% this year, said Dave Nikolai, a specialist in that area. For technology companies, premium increases can be 100% or more. Executives can expect to pay $4,500 to $5,000 per million dollars of liability coverage, up from $3,000 last year, and coverage may be limited. Nikolai said one reason is that payouts in court settlements for securities fraud have grown much bigger in the past year.

Also, he said, in the wake of Enron's fall, insurance carriers are asking for much more detailed information from their clients.

John Zern, a specialist in employee benefits services, said medical inflation continues to put pressure on the cost of employee health insurance. In particular, he said, prescription drug spending rose 17% last year, and will continue to go up at a similar pace. He said companies increasingly will ask employees to tailor their medical insurance spending for specific needs.

   Use Of Derivatives Can Cut Financial Risk

Marsh believes the insurance industry can work with the U.S. capital markets on financial products that manage companies' risks in a new way - and simultaneously bring new products to the market for investors.

Ram Kelkar, former managing director of Merrill Lynch & Co.'s structured finance group in New York, this month joined Marsh in Chicago to oversee development of derivatives products.

Products include credit derivatives, which transfer the risk of a credit loss to a counterparty; CDO's, the securitization of corporate obligations such as loans and bonds, and asset-backed securitization. He said the market for these kinds of derivatives is growing rapidly.

Kelkar said securitization markets are opening up for all kinds of receivables from taxi medallions to health club membership fees. Using beleaguered Enron Corp. as an example, Kelkar said that even though the company has seen its stock and bonds lose almost all their value, its asset-backed commercial paper is still intact and making money for investors.

-By Ann Keeton, Dow Jones Newswires; 312-750-4120 ann.keeton@dowjones.com

Updated April 9, 2002 4:11 p.m. EDT