Liability insurance buyers are paying dramatically more for a little less, according to a new study by Marsh Inc.

Average limits purchased by U.S. companies are about 9% lower in 2003 compared with 2002, according to Marsh's research, while rates are more than 60% higher.

The very largest companies, however, were less likely to have lowered their limits, despite the higher cost, the survey found.

The current cost per $1 million of liability coverage is virtually identical on a worldwide basis, according to the study. The cost in 2003 averaged $11,614 in the United States and $11,670 in the rest of the world.

But those costs are sharply higher compared with a year ago, which is largely to blame for the reduction in limits, the study notes. The study reported a 63.4% increase in the average cost of $1 million of coverage in the United States from 2002 to 2003.

That rate of increase far outstripped the rate of decline in liability insurance limits, according to the study. Average limits for U.S. companies dropped 9.4% at January renewals to $87 million, compared with a year earlier.

"What that really means is firms are not living within a fixed budget," said Timothy P. Brady, managing director in Marsh's National Casualty Practice in New York. "They're spending more of their resources to purchase risk transfer."

"There is a recognition that having protection against catastrophic losses is still something that is understood and valued," Mr. Brady said.

And, apparently, that's most recognized by the very largest companies, as U.S. companies with annual revenues of $10 billion or more—those most likely to be able to absorb the balance sheet hit of a loss—decreased their liability limits only 0.6% in 2003 compared to 2002.

"The smaller firms made the most dramatic change in what they bought," Mr. Brady said. "So to me, an observation is, if you don't purchase risk transfer, then really what you're doing is putting your balance sheet out there. I found it interesting that the firms with the largest balance sheets continue to buy the largest limits."

Marsh's survey examined the insurance buying practices of 4,329 respondents, of which 2,726 were U.S. companies.

The Marsh study also found differences in buying habits between those companies that have experienced a loss of $5 million or more and those that haven't. Average limits purchased by companies that had not sustained such a loss decreased 21.9% to $75.0 million in 2003 from $96.0 million in 2000, while companies that had a loss maintained essentially the same level of limits—$207 million this year—throughout the hard market.

A key factor driving changes in the liability market is the increasing frequency of large jury awards, according to the study.

Looking at "peak probability awards"—the peak figure in the middle 50% of all awards in a category—Marsh reports that the PPA for U.S. product liability awards tripled between 1994 and 2000 to $4.8 million and nearly doubled between 2000 and 2001 to $9.4 million.

Meanwhile, the PPA for death to adult males in the United States increased 185.7% to $4.0 million in 2001 from $1.4 million in 1994. The growth in the PPA for death to adult females is even greater, increasing 370% to $4.7 million in 2001 from $1.0 million in 1994.

"One of the cost drivers is at what point is your umbrella attaching excess your primary coverage," Mr. Brady said. At the level of current average awards, "an individual death is approaching that value," he said. Consequently, "the umbrella underwriters are seeing a greater frequency of claims that are penetrating the umbrella layer," he said, and they are moving to raise umbrella liability coverage attachment points.

"What's happening is, not only are companies paying more for their coverage, the coverage itself is attaching slightly higher up," Mr. Brady said.

Factors such as increases in the size of jury awards and health care cost inflation raise another serious issue for insurance buyers, Mr. Brady said, which is determining the likely value of the loss at the time the claim is actually paid.

"Part of what we have to consider is when do these claims get paid," he said. "One of the things we've uncovered is these claims, on average, take four or five years to wend their way through the legal system."

As a result, insurance buyers need to think in terms of what their limits will be worth in four or five years, Mr. Brady said. "They're doing the same sort of work that the underwriters have been doing," he said. "And the challenge there is to value the loss when it's going to be paid, not necessarily when it occurs."

Differences in litigation environments around the world also have a significant effect on companies' loss experience, according to the study, and must be factored into risk managers' insurance buying decisions, Mr. Brady said.

"The challenge there is, where are your exposures?" he said. A U.S. risk manager protecting a company based on U.S. liability risks is "very likely to find themselves well protected elsewhere in the world," Mr. Brady said. But, for a company based in a less litigious country but with U.S. exposures, "the challenge then becomes to buy limits for the worst-case scenario in the worst- case legal environment," he said.

Copies of the Marsh's "Limits of Liability 2003" report are available through local Marsh offices or by calling Peggy Sheretz at 212-345-3393.