Some businesses, such as Praxair Inc., a Danbury, Connecticut-based industrial gases company with $5.1 billion in annual revenues, are turning to their brokers for guidance. "We hired Willis Risk Solutions to help us do an analytical assessment of the SIR that would be appropriate given our size, range of exposures, and appetite for risk," says Richard Inserra, Praxair assistant treasurer and risk manager. Willis is creating an algorithm to model the cost of Praxair's risk at various risk-retention levels. Similarly, for Costco, which is expecting higher retention rates when its policies come up for renewal, broker Sandy Dillmann of Marsh is using financial modeling to determine what loss levels would have a direct impact on earnings per share.

Scholastic is taking its SIR on the chin, at least for the time being. "We're just going to pay the $250,000-per-claim SIR out of cash flow," says Marzano, a strategy that he too says will be reevaluated at the next renewal cycle. Not all is doom and gloom, though. "We get to pay losses now as we go, as opposed to paying the insurer one big chunk of money up front," he says. "If there are no losses, we'll at least get some [investment] float on the money."

A Shared Liability

Another area where insurers are insisting that companies share risk is directors' and officers' insurance. Stung by the increased costs of securities litigation, D&O carriers are demanding larger co-payments over and above any deductible paid.

The strategy is an about-face for the industry. In the mid-1990s, most carriers actually waived the co-insurance element requiring corporations to absorb a percentage of per-claim costs for what was then a nominal additional premium charge. Before long, they waived that additional charge as well. "Basically, D&O insurers were taking on greater exposure to loss and not charging for it," says Steven Anderson, managing director of Marsh's FINPRO unit.

The strategy failed. By not requiring companies to pay a percentage of losses, insurers say, there was little incentive to curtail litigation settlement costs. "Companies no longer had a financial stake in what the settlement amount would be," explains Anderson. "Since they had no skin in the game, it became immaterial if the settlement was $20 million or $50 million, provided it was within their overall D&O limits."

Insurers argue that the increasing number of earnings restatements will only fuel shareholders' resolve to sue, and they are reinstating the co-insurance element. Such carriers as AIG and Chubb have already announced that they are requiring it, and the rest of the market is expected to follow suit by the end of the year. "The only question is the amount of co-insurance demanded," says Anderson. At a minimum, companies will have to fork over 20 percent of per-claim losses above the SIR. Meanwhile, the cost of new policies will be at least 30 percent higher than what companies paid two years ago for full coverage.

Sidebar: Where the Losses Are

U.S. insurance losses from the terrorist attacks will be second only to the long-term costs of asbestos liability.

• Asbestos liability: $55-$65 billion
• Terrorist attacks 9/11/01: $30-$58 billion (estimated)
• Enviromental liability: $30-$40 billion
• Hurricane Andrew: $20 billion

Source: Tillinghast-Towers Perrin

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