Securities Class Actions

42. The percentage drop in securities class actions, which have fallen well below historical averages. According to the report, the 59 filings recorded in the first half of 2007 was down from the average semi-annual filing rate of 101 reported for from July 1996 through June 2005. The report was issued by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.

For the two-year period beginning the second half of 2005, the average semi-annual filing rate was 61 filings, 40 percent below the average observed over the preceding nine-year period.

"We've now had two years worth of extremely low filing activity," explained Stanford Law School Professor Joseph Grundfest, director of the clearinghouse and former Commissioner of the Securities and Exchange Commission.

"This is starting to look like a permanent shift, not a transitory phenomenon."

Direct Purchase

40. The percentage of U.S. adults who say they would purchase automobile insurance directly via phone, Internet or mail without first consulting an agent, an increase from 29 percent in 2003, according to a Vertis study. In particular, adults ages 35-49 are 15 percent more likely than their counterparts were in 2003 to make a direct auto insurance purchase without seeing an agent, up from 30 percent in 2003 to 45 percent in 2007. However, the study also noted that an insurance company possessing a knowledgeable agent or representative continues to be the most important insurance service for 27 percent of all adults in 2007, up just 2 percent from 2003.

Katrina at Two Years

$40.6 billion paid on 1.7 million insurance claims

Two years after Hurricane Katrina struck, the "overwhelming majority of claims" in Gulf Coast states from her destruction have been settled in what has been the single largest loss -- $40.6 billion -- in the history of the insurance industry.

The magnitude of Hurricane Katrina triggered a reexamination of how the country deals with the financial consequences of natural disasters among insurers, reinsurers and public policymakers, which continues today, according to the Insurance Information Institute.

Despite the attention focused on lawsuits filed following this catastrophic storm, the number of claims in litigation accounted for a very small percentage of the total number of claims filed and most of those are no longer in contention, according to the insurance organization. The III estimates that fewer than two percent of homeowners claims in Louisiana and Mississippi were disputed either through mediation or litigation.

Insurance companies have paid an estimated $40.6 billion to policyholders on 1.7 million claims for damage to homes, businesses and vehicles in six states. By contrast, Hurricane Andrew, the previous record holder, resulted in $15.5 billion in losses in 1992 ($22.2 billion in 2006 dollars) and 790,000 claims.

Louisiana ($25.3 billion) and Mississippi ($13.6 billion) received by far the most insurance dollars to aid in their recovery.

Approximately 99 percent of the 1.2 million homeowners insurance claims from Hurricane Katrina, including those in hard hit Louisiana and Mississippi, have been settled. Claims payments to homeowners in affected states exceeded $16 billion, approximately 93 percent of which went to Katrina victims in Louisiana and Mississippi.

In Louisiana, approximately 688,000 homeowners claims, totaling $10.8 billion, have been settled. In Mississippi, more than 350,000 homeowners claims, totaling $5.4 billion, have been settled. Effectively all of the nearly 350,000 claims from damaged vehicles, totaling $2.2 billion, have been settled.

In Louisiana, 537 out of more than 1,000 suits filed in U.S. District Court remain on the docket. The state-sponsored mediation program in Mississippi has settled 3,034 of 3,687 cases in that state.

"While 2005 was by far the worst year ever for insured catastrophe losses in the U.S., future storms could prove even costlier, reaching upwards of $100 billion," said Dr. Robert Hartwig, president of the III. "Disaster losses along the coast are likely to escalate in the coming years because of huge increases in development and soaring property values."

The total value of insured coastal exposure nationwide is more than $7 trillion. Florida and New York have the most insured coastal property, at more than $1.9 trillion each. After Florida, the Northeast states of New York, Massachusetts and Connecticut have the highest coastal exposure as a share of all insured exposure in their states.

While some insurers in some coastal states are not writing new homeowners policies, none have withdrawn entirely from any states, according to the III, which also says that coverage is available in every state, either through private insurers or a state-operated insurance company. Also, insurers continue to provide coverage to their existing policyholders through their contract periods.

In areas vulnerable to hurricane risk, rates have been rising in recent years and they will continue to do so, noted Hartwig. This is because the frequency and severity of catastrophic storms is expected to grow for decades to come.

"Insurers cannot increase rates to make up for past losses. Rates must be based on projections of future losses in a given state," said Hartwig. "Insurers cannot arbitrarily raise rates; they must be reviewed and approved by state insurance departments. Companies must demonstrate that there is an increased risk in a specific state, and losses from one state cannot be used to raise rates in another."

Rolling NBCR

"Rolling NBCR [nuclear-biological-chemical-radioactive coverage] into terrorism coverage will likely result in significantly increased premiums and would likely have the unintended consequence of reducing the take-up rate for terrorism insurance. Requiring any retention of NBCR risk by primary insurers (even where the federal program bears most of the risk) makes little sense if insurers cannot find private reinsurance and if we are unable to resolve a set of very serious operational concerns and issues."

Warren Heck, chairman and CEO of Greater New York Mutual Insurance Co., testifying on behalf of the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America.

Different this time
"Unlike other pricing cycles, which have been deep and long on the downside, we may experience something different this time around. Our reason for this cautious optimism is our overall view that as enterprise risk management is playing an increasing role at insurance and reinsurance companies, financial discipline will have a larger role this time."

-- Standard & Poor's Managing Director Grace Osborne in May, 2007 discussing that the hard market, however short, is over.

ERM questions
"In three or four years I think many CEOs and CFOs of firms that have put a lot of executive time, effort, and money into enterprise risk management will be asking what they are getting in return. There are going to be some really hard questions asked."

-- Bill Panning, executive vice president, Willis Re, in July, 2007.

Insurance classic golf champions

Boise, Idaho native Madeleine Sheils finished with a total of 9-over-par 293 to claim a two-shot victory in the 2007 Trusted Choice Big "I" Junior Classic. In the boys' division, Tommy Gibson of Pilot Mountain, N.C. shot his third-consecutive round of 1-under-par 70 to finish with a four-round total of 281.

The tournament took place at the Crane Creek Country Club in Boise, July 29- August 2.

Lindy La Bauve of Scottsdale, Ariz., finished second while 2006 Champion Kristen Schelling of Mesa, Ariz., finished in third place.

Andrew Perez of Oxnard, Calif., and Logan Harrell of Huntersville, N.C., finished in a tie for second in the boys' division.

The classic is coordinated by the Independent Insurance Agents & Brokers of America. More than 4,000 golfers compete for a spot in the national tournament. More than 1,000 independent agents help organize the local qualifying tournaments. It is presented each year by The Tiger Woods Foundation. Allied Insurance is the event's lead sponsor.

Visit the official website of the 2007 Trusted Choice Big "I" Junior Classic, www.iiajc.com.

Court affirms flood exclusions in La. property policies

Two federal appeals court rulings in early August in class-action lawsuits stemming from Hurricane Katrina-related property damage in Louisiana underscored the validity of flood exclusions in property insurance policies.

In a highly anticipated decision, the U.S. 5th Circuit Court of Appeals in New Orleans ruled Aug. 2, 2007, in In re Katrina Canal Breaches Litigation, No. 07-30119, that property owners in New Orleans whose buildings were flooded as a result of levee breaches in the aftermath of the August 2005 hurricane have no standing to recoup their losses from their insurance companies because of the flood exclusions in their insurance policies.

On Aug. 6, the 5th Circuit Court released an opinion in Chauvin v. State Farm Fire & Casualty finding that Louisiana's valued policy law (VPL) "does not apply when a total loss does not result from a covered peril."

The rulings could affect thousands of residential and business policyholders in the New Orleans area while saving insurers an estimated $1 billion or more in payouts.

Jeff Albright, CEO of the Independent Insurance Agents & Brokers of Louisiana, hailed the rulings as a major step in Louisiana's recovery process. "These critical Appeal Court rulings reaffirm the clear policy exclusions for water damages and lift the cloud of uncertainty that has been hanging over the industry since the district court judges ruled that flood damages must be paid by insurers," Albright stated. "Insurers can now rest assured that flood exclusions will be held valid and that statutes such as the valued policy law will be interpreted fairly, and not used to find insurance coverage where none exists."

Plaintiffs in the canal breaches case had contended that because their properties were flooded as a result of the levee failures -- a "man-made act" -- the flood exclusions in the policies were void. According to court filings, the plaintiffs argued that "the massive inundation of water into the city was the result of the negligent design, construction and maintenance of the levees" and that the policies' flood exclusions in that context are ambiguous because they do not clearly exclude inundation of water induced by negligence.

The Court disagreed, concluding "that the plaintiffs are not entitled to recover under their policies." The Court opinion, written by Circuit Judge Carolyn King, stated "that even if the plaintiffs can prove that the levees were negligently designed, constructed or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs' policies unambiguously preclude their recovery. Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs' property. This event was excluded from coverage under the plaintiffs' insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written."

Insurer trade groups praised the decision. The American Insurance Association said the ruling "corrected an earlier, flawed decision by U.S. District Judge Stanwood Duval in which he constructed a manmade v. natural causation distinction not found in property insurance policies in order to defeat a clear exclusion applying to the flood losses at issue."

Allstate, Encompass, State Farm and Unitrin were among the defendants in the suit.

The case was sent to the 5th Circuit after Judge Duval, with the U.S. District Court for the Eastern District of Louisiana, ruled in November 2006 that ambiguous language in the water damage exclusions in some insurance policies left open the possibility that the plaintiffs could have standing to recover losses under their policies. Duval refused insurers' attempts to have the case dismissed. Instead, he sent it to the 5th Circuit Court for a review.

Although he had expected the district court's opinion to be overruled, Robert Redfearn Jr., an attorney with New Orleans-based Simon, Peragine, Smith & Redfearn, LLP, expressed surprise that the 5th Circuit issued an opinion so quickly. He surmised that the "court wanted to get the opinion out before Aug. 29, 2007, the second anniversary of the hurricane" and the date by which Katrina-related claims lawsuits must be filed in Louisiana.

Redfearn said the plaintiffs can ask for a re-hearing, or en banc review, by the 5th Circuit and then appeal to the U.S. Supreme Court. He said the plaintiffs likely will ask for a re-hearing, but speculated that the court would refuse to look at the case again.

Valued property law
In Chauvin v. State Farm Fire & Casualty, the plaintiffs were homeowners whose property was severely damaged as a result of Hurricanes Katrina and/or Rita. The plaintiffs sued insurers when they "refused to reimburse them for the full value of their homes as stated in their policies." The plaintiffs alleged that under Louisiana's Valued Policy Law (La. Rev. Stat. Ann. § 22:695) they were entitled to the agreed upon face value of their homes.

The losses were the result of damage from wind, which is covered under the typical homeowners policy, and flooding, which is not. The district court previously concluded that Louisiana's VPL does not apply when a total loss is not entirely the result of a covered peril and granted the defendants' motions to dismiss and/or motions for judgment.

The 5th Circuit rejected the plaintiffs' argument that the VPL applied to a total loss that was the result of both a covered peril and a non-covered peril.

The IIABL's Albright noted that the Chauvin opinion supports the insurance industry's interpretation of the VPL, which is that an insurer should not be forced to pay damages that result from a peril for which it did not collect a premium.

In addition to State Farm, Hartford, Allstate, USAA and Standard Fire were among the defendants in the Chauvin case.

No region of country is immune to wildland fires

Some states face tougher seasons than others but every state must deal with the threat

Historically, the lion's share of in-season wildland fires occurs in the country's western regions, however, as evidenced by the massive blaze in Georgia that torched more than 900 square miles and several in northern states, wildfires are not restricted to the west -- and never have been.

The truth is that wildland fires can and do happen anywhere and everywhere.

The National Interagency Fire Center, headquartered in Boise, Idaho, maintains a list of some of the most serious wildland fires in U.S. history. Some were significant because of their size, others because of the value of the resources lost. Some small, but very intense, fires were important because of the loss of lives and property and resources.

NIFC fire statistics date back to 1804. According to their records, the "Great Chicago Fire" of 1871 claimed 250 lives and 17,400 structures were destroyed. The acreage was undetermined.

No region of the country is immune to wildland fires. This August, a fire on the Upper Peninsula of Michigan pushed past fire lines and grew to more than 12,000 acres. The size of the fire made it larger than the 1999 Tower Lake fire, another big U.P. blaze, according to the Michigan Department of Natural Resources.

In May, a fire burned about 13,500 acres, almost 20 square miles, of brush and pine forest in southern New Jersey, about 25 miles from Atlantic City.

In the spring and summer of 2007, serious wildland fires have been reported in California, Utah, Colorado, South Dakota, Georgia, Florida and Alabama.

Gillingham & Associates, located at the base of the Rocky Mountains in Westminster, Colo., specializes in coverage of outdoor recreational risks such as hunting lodges, dude ranches and other entities that are located in rural and remote areas, many times in the direct path of wildland or grass fires. According to Glenn Sudol, president and underwriting manager for Gillingham & Associates, there has not been any significant increase nationally in terms of number of major fires -- categorized as having burned more than 500 acres.

"It's been a tough year in Idaho and Montana but in any given year it goes state by state, depending on drought conditions," Sudol said. "Two of our properties in Montana had to be evacuated this year and the Forest Service took one over as a command center."

While most wildfires cause minimal damage to land and pose few threats to people, the U.S. Department of Agriculture Forest Service points out that some fires cause damage that requires special efforts to prevent problems afterwards. After a fire, the first priority for the Forest Service's Burned Area Emergency Response team is emergency stabilization in order to prevent further damage to life, property or natural resources.

Fire officials have been forced to try some new tactics.

In a July, the officials with the Forest Service in Idaho began a cracking down on people who abandon campfires that can spark a wildfires. "People who abandon campfires may receive more than a violation notice," said Sandra Groth, Coeur d'Alene Interagency Dispatch Center fire prevention specialist. "They may be liable for wildfire suppression costs."

Secretary of the Interior Dirk Kempthorne authorized Forest Service supervisors to entice retirees back into service. Kempthorne's was hoping to mobilize about 1,000 additional employees to assist in wildland fire suppression and support activities. He waived the agency's rules so that retired Interior firefighters could be temporarily rehired without losing pension benefits.

In addition, Kempthorne issued a safety memorandum to all employees stressing the need for increased precautions during the busy outdoor summer season, especially for wildland firefighters.

"Safety is more than just a priority; it needs to be a way of life and a part of our thinking, whether on the fire lines, traveling to fire sites or in camp," Kempthorne said.

To the extent that wildfires have affected insured properties, claims appear to be being handled in stride. Gary Landry, of the Florida Insurance Council, notes that his association "really did not hear any complaints" regarding insurance, leading him to deduce that those who were affected and filed claims for wildland fire-related property damaged "were covered and from that standpoint, satisfied."

Since insurers face costly claims in high-value residential areas and in some cases discontinue writing policies due to wildfire proximity, one activist thinks the insurance industry should get more involved in efforts like his to prevent the spread of wildfires.

Fire service veteran Tom Robinson claims his efforts to curb the destruction are being stonewalled by the U.S. Forest Service. Robinson, chief of Global Emergency Response and International Liaison to the Russian Government, has offered the Ilyushin 76 (IL-76) four-engine prop plane supertanker to the U.S. Forest Service each year since 1995. According to Robinson, the IL-76 tanker aircraft could do in days -- or hours -- what takes the U.S. Forest Service weeks and even months to accomplish.

U.S. Representative Dana Rohrabacher, R-Calif., said he is trying to expand the availability of the tanker type aircraft in case of emergency. "I've done my best to try to convince the Forest Service at a time when the old fleet has diminished and to take steps to increase their capacity," Rohrabacher said. "If they're caught without the ability to call on the appropriate measures, it will be a great disservice to our people."

Too close for comfort

Pro teams grapple with risks of keeping fans close to action

Tiger Woods had a rough weekend at the British Open in July, and so too did Jennifer Wilson, the 63-year-old fan who required two stitches to her bloodied head after she was beaned by one of his wayward shots.

Her injury highlighted the perennial challenge faced by those who oversee golf and other big-time spectator sports -- finding the proper balance between fans' proximity to the action and their safety.

Major league baseball teams warn fans before every game to be alert for foul balls and the occasional flying bat. NASCAR has heightened fences to keep flying debris out of the grandstands. The National Hockey League ordered safety netting installed at each end of NHL arenas after a 13-year-old girl was killed by a deflected puck at a Columbus Blue Jackets game in 2002.

And at the Tour de France, fan safety has for years been a source of controversy and concern as thousands of spectators line the route each day, usually without any barriers separating them from the cyclists. One boy was killed in 2000 and another in 2002 by sponsors' vehicles accompanying the race, and a 78-year-old man was badly injured this year when struck by German rider Patrik Sinkewitz after the eighth stage.

Golf's ruling powers have as tough a task as anyone, given the huge throngs that attend major tournaments and the inevitability that even the best pros will send an occasional shot soaring spectacularly off-course.

Laser technology
PGA Tour spokesman Bob Combs said advanced technology, along with a dose of common sense, has enabled the PGA to minimize the risk to fans while affording them a close-up view of the action.

"It's something we're very mindful of," Combs said. "We try to educate fans to stay alert, to stand away from likely areas of play."

The PGA now uses lasers to map the location of every shot by every competitor. Over a period of years, if the tour returns to a given course, the PGA is able to identify areas that are safe for fans to congregate, and it ropes the course accordingly, Combs said.

"We also keep an eye on the weather," he said. "If a strong wind is coming up, and pushing balls to an area where they were not anticipated, we adjust the roping on a given day."

On television, it sometimes appears that a golfer playing from the rough must hit through a narrow opening lined by fans on each side. But Combs said the perspective on TV can be misleading, and the tournament marshals ensure there is ample open space for any shot.

Wilson, the woman conked by Woods' approach shot during the British Open at Carnoustie's 6th hole, emerged from her ordeal in good spirits, but the event was unsettling. "I had a pit in my stomach," Woods said. "There was blood all over the place. I don't know how she was smiling."

Wilson and a freelance photographer beaned the same day by a tee shot of Sergio Garcia both received autographed golf gloves as compensation for their pains.

Baseball beanings
In baseball, fans hit by thrown bats are sometimes offered another bat to keep as a souvenir.

But MLB teams are adamant that they bear no legal responsibility for injuries from thrown bats or batted balls, and they print detailed disclaimers on the backs of their tickets. In 2004, a Massachusetts appellate court threw out a lawsuit filed by a woman who said she incurred nearly $500,000 in medical costs and lost wages after being struck in the face by a foul ball at a Red Sox game.

Even someone with scant knowledge of baseball should realize that "a central feature of the game is that batters will forcefully hit balls that may go astray from their intended direction," the court ruled.

Though dozens of MLB fans are struck by foul balls each season, there has been only one fatality from such an incident, according to baseball researchers -- a 14-year-old boy killed by a foul line drive off the bat of Manny Mota at Dodger Stadium in 1970.

Hockey pucks
Until 2002, the NHL had gone through its entire history without a fan being killed by a flying puck. But in March of that year, 13-year-old Brittanie Cecil was struck in the head on a shot by Columbus' Espen Knutsen that deflected into the stands. She died two days later, and her parents eventually obtained a $1.2 million settlement from the team, the league and the arena management.

Brittanie's death prompted the NHL to require safety nets at both ends of the ice in every arena. Initially, many fans were displeased -- saying their view from behind the goals was now distorted.

Not all fan injuries result from flying objects.

In 2004, Oakland A's fan Jennifer Bueno suffered a broken nose from a chair thrown by Texas Rangers relief pitcher Frank Francisco, who was angered by heckling from Bueno's husband. Earlier this season, Paul Robinson broke his neck when another fan at Yankee Stadium toppled onto him from a higher row of seats; Robinson said the man was drunk.

Whatever the risks for spectators, they are perhaps greater for coaches.

A Green Bay Packers assistant coach, Gil Haskell, suffered a skull fracture when he was bowled over by a player on the sidelines of the NFC title game in 1996. Another sideline collision last season left Penn State head coach Joe Paterno with a broken shinbone and two torn knee ligaments.

In early July, a Colorado Rockies minor league coach, Mike Coolbaugh, died after being struck in the head by a line drive as he stood in the first-base coach's box during a game in North Little Rock, Ark. The accident raised the question of whether base coaches should be required to wear helmets.

"The safety of players and fans and people in the ballpark is always our No. 1 priority and it is something we will be discussing," baseball spokesman Pat Courtney said.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Operators, not watercraft, cause accidents

According to U.S. Coast Guard, boating accidents on the water increased in 2005 with 4,969 reported accidents and 697 fatalities. California ranked first with 630 reported boating accidents and 58 fatalities in 2005, and Florida ranked second with 603 reported boating accidents and 78 fatalities.

The leading causes of boating accidents are all operator-controlled, such as inexperience, inattention, and collisions with other vessels or fixed objects such as docks.

The Personal Watercraft Industry Association says that while recreational boating accidents do, unfortunately, occur, the vast majority are completely avoidable. Fatal accident data show that in 2005, approximately 426 lives could have been saved if boaters had been wearing life jackets.

"The very first step is to take a boating safety class," says Maureen Healey, executive director of the Personal Watercraft Industry Association. "Approximately seven out of 10 boating fatalities occurred on boats where the operator had received no boating safety instruction."

Boating safety courses are available through many organizations, including the U.S. Coast Guard Auxiliary and the U.S. Power Squadrons.

Reinsurance 2007 -- A victim of success?

Record earnings, capitalization and profits deliver new challenges for reinsurers

If the reinsurance industry were a game of golf, one would say that after three rounds -- the two halves of 2006 and the first half of 2007 -- it tops the leader board. But as any golf buff knows the final 18 holes frequently decide the outcome. Despite, or perhaps due to, record earnings from a benign year for natural catastrophes, increased capitalization, bulging reserves and a series of premium increases, the industry faces the consequences of its own success.

Reinsurance, however, is not a unitary industry. Trends in one area, property, for example, frequently don't manifest in other lines, such as aviation. The United States is the largest market for reinsurance, but, paradoxically, the majority of P/C reinsurance treaties ultimately originate from outside the country. With the acquisition of GE Insurance Solutions by Swiss Re, Berkshire Hathaway's General Re and its affiliates are the last major P/C reinsurance group based on U.S. soil.

In a bulletin released in mid-July the Reinsurance Association of America noted that in 2006, total U.S. premium ceded to offshore reinsurers was $54.7 billion and ceded recoverables totaled $114.2 billion. That represented an 11.9 percent decrease in premiums and a 7.8 percent decline in recoverables since 2005.

That year, of course, was the worst on record for natural catastrophes. However, even with the huge premium increases in some areas, mainly property coverage in Florida and along the Gulf Coast, the premium and recovery levels still declined.

It was an industry decline. There were simply fewer premiums paid. In fact, according to the RAA, "offshore companies' share of U.S. unaffiliated reinsurance premium increased to 53.1 percent in 2006 from 51.8 percent in 2005, while the market share of offshore companies and U.S. subsidiaries of offshore companies decreased to 84.5 percent of U.S. unaffiliated reinsurance premium in 2006 from 85.4 percent in 2005."

The RAA identified the United Kingdom and Ireland, Germany, the Cayman Islands, Switzerland, and Barbados as the "largest markets for unaffiliated premiums ceded and recoverables due in 2006."

Why the decline, when the need for coverage remains strong? Part of the answer lies in the market itself. "Why transfer some risks, if you can absorb them," said Thierry Van Santen, head of Corporate Risk Management of France's Groupe Danone, speaking at the European Insurance Forum (EIF) in Dublin last March. "Why buy insurance, if between the write-offs [from a loss] and the cost of rebuilding, the company can cover the risk?"

Another member of the same panel, Paul Taylor, head of Group Risk Management and Insurance at Tetra Laval added: "If big corporations have better ratings than the insurance companies, why transfer the risk?"

What they were saying validates the ongoing trend, especially among major multinationals, to take on increasingly larger shares of primary risk. They may buy only excess policies over certain limits, or they may establish captives, who then purchase reinsurance at much higher -- and therefore cheaper -- levels. As globalization creates bigger and fewer companies, this trend is set to continue.

Cat bonds, sidecars
The growing availability of the capital markets in the form of cat bonds, sidecars and other securitizations also offers an alternative to classic reinsurance. Although they remain expensive, such devices have the added advantage of removing large chunks of risk from the balance sheet.

In its recent review of the July reinsurance renewals, Willis Re identified four "macro factors" that are leading a downward slide in rates. It reconfirmed earlier findings that "favorable 2006 financial results, continued capital infusion, diversifying reinsurer appetites, and the populist movement in the United States, were working to depress reinsurance property pricing and in turn increase competition for other lines of business. These four factors continue to impact the marketplace unabated."

Willis also identified a fifth factor that emerged with the July renewal cycle (which is dominated by North America/Caribbean property renewals). There is a "pronounced disconnect between the insurance and reinsurance markets. While insurance and reinsurance prices are both dropping there is a differential in the pace of each markets' price decreases. Insurers are being squeezed and they are struggling to make their 2007 budgets. Insurers are getting less money for the insurance they sell and they have to pay more for the reinsurance they buy."

As a result, one common solution has been to buy less reinsurance. There is, as a consequence, less premium in the reinsurance market. Reinsurers, trying to meet their own budgets are starting to compete more aggressively for the remaining more volatile business. This aggressive competition will soften the reinsurance market, and merger and acquisition activity will likely increase as pricing disciplines collapse.

So far, that hasn't happened. At least since 2001 the major reinsurers have preached the mantra of adequately pricing risks, and rejecting those that don't meet their underwriting criteria -- even if it means a reduction in premium income. Lloyd's Chairman Lord Levene, Swiss Re's former CEO John Coomber and his successor Jacques Aigrain, Hannover Re's CEO Wilhelm Zeller, Munich Re's Management Board Chairman Nikolaus von Bomhard have all sworn that their respective companies will not lower rates to attract market share.

Solvency II
Willis might also have to add a sixth emerging factor to its list -- the impact of the Solvency II Regulations on the European Union's insurers. Even though companies like Swiss Re and Munich Re operate through U.S. subsidiaries, they remain European. Switzerland, although not an E.U. member, follows its regulations.

Solvency II will rewrite the book on insurance regulation. Yann Le Pallec, head of Standard & Poor's European Insurance Practice, described it as "a revolution" at the International Insurance Society (I.I.S.) Conference in Berlin in July. When (and if) it comes into force in 2012, Solvency II will mandate that capital and reserve requirements be risk-based. It will require the E.U.'s insurers and reinsurers to accurately assess their risks, and fund them accordingly. The higher the risk, the higher the capital requirement. The process envisages a continual assessment of those risks.

Given the overwhelming presence of Europe's reinsurers in the United States, how they keep their books will affect how they do business. In simplistic terms, "if you can't get your prices, you must exit the market," said Hannover Re's Wilheim Zeller in his presentation to the I.I.S. Conference.

As Willis Re's CEO Peter Hearn wrote: "One final observation, the reinsurance industry is undergoing a seminal change. The competitors are no longer merely other reinsurers. The competitors are capital markets, local governments, residual markets and self insurance."

If the reinsurers hadn't been so successful, they might have less competition, but now it's up to the industry to meet the challenge. After all, there are 18 holes to play.

Choosing a big brother

Experts interviewed by The Conference Board suggest some criteria when selecting a potential partner:

• Before bringing in lawyers to draw up contracts, get the partnering teams together in a room to talk about philosophy and goals. Said Robert Spekman, professor at the University of Virginia's Darden School, and author of Alliance Competence: "I don't care how good the deal is. If your partner doesn't share the same vision, the same set of morals and ethical standards, walk away."


• Look for clues that the larger partner takes you seriously and truly wants to help foster your growth as well as its own. You need assurances that your company will be listened to and have a voice in major decisions.


• Do your due diligence about the potential partner's behavior in past alliances, whether it has kept its promises and maintained the trust of its partners.

Although many innovative smaller companies fear that a bigger company may steal its proprietary technology or processes, a bigger risk is that they will take too long to do the deal or won't achieve the objectives because the more process-heavy partner can't move fast enough, said McKinsey's Ernst.

He suggested a few ways to reduce the risk when small companies partner with big companies:

• Talk to at least three companies and create an "auction" for the product or technology that you want assistance in commercializing. Without a firm auction date, big companies may take their time coming to the table.


• Ask for estimates on how long it takes the company, on average, to make key decisions, such as hiring a new plant manager or launching a new product.


• Find out what marketing and R&D resources the company plans to assign to the alliance. Ask, for example, "who are you going to assign to work on this project?" and write their names into the contract.

The smaller company should estimate how much of the CEO's time will be consumed by the alliance. Because the smaller company may be staking its future on it, the CEO often takes charge of the alliance. Lost time for small to midsize companies means fewer sales. Will the returns justify this diversion of the leader's attention? If so, the CEO should have a backup team in place to run the company while he or she is keeping the alliance on track.

Source: Brotherly Alliances, Engines of Growth, Executive Action No. 237, The Conference Board. Visit www.conference-board.org.