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The Wall Street Journal: Insurance Buyers Seek To Sidestep Rate Boost: "Since the early 1970s, the oil and energy industry has pooled many of its large risks in an insurance vehicle called Oil Insurance Ltd., or OIL, domiciled in Bermuda. It has more than 80 corporate members today, including industry giants Royal Dutch Shell PLC and ChevronTexaco Corp.": Monday 26 September 2005

As Premiums Look Likely
To Rise Following Storms,
Firms Explore Alternatives

September 26, 2005; Page C3

With the global insurance industry still trying to calculate the extent of losses from hurricanes Katrina and Rita, some corporate insurance buyers already are looking at how to avoid the likely rate increases that insurers will demand to restore profitability.

The full extent of the price increases will only be apparent at the beginning of next year, when most insurers renew their largest corporate contracts. In a study of the bellwether Lloyd's of London insurance market issued last week, Moody's Investors Service Inc. said it expected corporate insurance rates to climb back to, or above, 2003 levels, after two years of declines.

Already, some insurers have told energy companies as far from the two storms' Gulf Coast strike zone as the U.K. that their annual premiums could increase 20% to 50%, as the insurance industry tries to recoup losses estimated at as much as $60 billion for Katrina alone.

How aggressively the insurance industry will push prices higher is an open question. Price rises after major disasters are common. Insurance rates for many corporate insurance policies doubled, for instance, in 2002 following the Sept. 11, 2001, terrorist attacks. This time around, the rise may not be quite so marked because many insurance companies are in better financial shape than four years ago, thanks primarily to those price increases of 2002.

Another reason insurers may temper their increases this time around is that corporate buyers -- still smarting from the sharp rise in insurance costs three years ago -- are likely to aggressively explore alternatives to conventional insurance.

"What you'll more shopping around, looking at each and every alternative," says Ernst Csiszar, president of the Property Casualty Insurers Association of America, a trade group.

Among the alternatives: greater use of self-insurance vehicles; sector-specific risk-sharing arrangements, such as ones already used by the oil industry and parts of the drug industry; more use of sophisticated financial instruments; and more spending on security and loss-prevention systems, and less on insurance coverage.

"If the insurers overreact in pushing up prices, there's a real threat that some insurance buyers will look for other options," says Charlie Cantlay, deputy chairman of the U.K. reinsurance unit of insurance brokerage Aon Corp.

"We're looking at a wide range of tools and structures to reduce the impact of the insurers' demands," says Andrew Turpin, a spokesman for the U.K.'s largest household gas and electricity supplier, Centrica PLC, declining to give details. He says the company is concerned about the "arbitrary way" insurers are seeking to push up prices given that risk exposure in the U.K. hasn't changed.

It isn't just the energy industry. Scott Malkin, chairman of Value Retail PLC, which operates nine outlet-shopping villages across seven European countries, says his business was hard hit by the post-Sept. 11 increases in property-insurance rates and that he will seek alternatives to avoid further increases.

"The insurance market is inherently inefficient," Mr. Malkin says. "Surges in price and capacity come from its herd mentality, which results in risk being priced too aggressively when there is ample capital available, or all pulling back and rejecting even the good risks when there is a shortage."

Other insurance buyers think governments should help. "If you have no alternatives, you have to accept what the insurer is proposing, and that's a weak position to be in," says Marie-Gemma Dequae, a Belgian risk manager who takes over as head of the Federation of European Risk Managers Associations next month. Ms. Dequae says that one of her first tasks will be to lobby for tax breaks for companies that set aside their own disaster reserves, rather than pay insurance premiums.

If companies do pursue such alternatives to insurance more aggressively, it could add to uncertainty over the outlook for insurance stocks. Since Katrina's Aug. 29 landing, shares of many of the world's biggest insurance and reinsurance companies have held up well, buoyed by expectations that the likely rise in premium rates would quickly feed through to insurers' earnings.

It won't be the first time corporate insurance buyers sought to sidestep the industry. After the 2001 terrorist attacks, for instance, there was a surge in demand for self-insurance vehicles, known as "captive insurers." Stephen Cross, who heads Aon's Captive Services Group, estimates that the captives market has doubled in size since 2001 to a range of $50 billion to $60 billion, measured in the equivalent of annual insurance premiums. The new hurricane-related losses "will be a catalyst to growing our business," he predicts.

Since the early 1970s, the oil and energy industry has pooled many of its large risks in an insurance vehicle called Oil Insurance Ltd., or OIL, domiciled in Bermuda. It has more than 80 corporate members today, including industry giants Royal Dutch Shell PLC and ChevronTexaco Corp. OIL, which says it still is too early to estimate the most-recent storm damages, covers its losses by charging its members a premium based on its previous five years' losses and by buying reinsurance.

Some companies also are shifting the risk of such disasters as earthquakes and hurricanes onto world financial markets. To date, most of the world's "catastrophe bonds" have been issued by insurers themselves to provide additional coverage in the case of a major disaster. However, a handful of noninsurance companies also have issued them.

One of the first, in 1999, was Japan's Oriental Land Co., which operates Tokyo Disneyland. Since then, three European groups have followed -- France's Vivendi SA, Electricité de France and the International Soccer Federation FIFA. Under the bonds, investors foot the bill for losses provoked by certain defined disasters.

Write to Charles Fleming at

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