Buyers’ Market for D&O
Overall, pricing for directors and officers insurance programs are down, thanks to increased carrier competition for excess lines, according to brokerage firms. But rates are higher for some sectors such as health care and life science organizations.
According to the “Aon Financial Services Group D&O Pricing Index” for the fourth quarter of 2014, the average price for $1 million in limits for Aon clients increased 10.3 percent from the third quarter of 2014, due mainly to the change in the mix of business from one quarter to the next.
Comparing the current quarter with the prior year quarter, the average price fell 12.2 percent.
For those programs that renewed in both Q4 2014 and Q4 2013, pricing fell 7.4 percent.
“We are entering a buyers’ market, as pricing is starting to come down in totality for these D&O programs,” said Brian Wanat, chief executive officer of Aon’s financial services group in New York City.
“We are entering a buyers’ market, as pricing is starting to come down in totality for these D&O programs.” — Brian Wanat, chief executive officer, Aon’s financial services group
While pricing for primary D&O policies is relatively flat, increased competition within the excess market is lowering prices, resulting in a net reduction for overall programs, Wanat said. As carriers such as Allianz SE in Munich enter the excess market, it creates a better supply environment, lowering prices.
“D&O has been profitable with no real increase in claims frequency or severity,” he said. “In many instances, only the primary layer comes into play, given dismissal rates where defense costs are contained and paid by the primary layer of D&O only, with the excess unscathed.”
Moreover, reinsurance, which has even softer prices, has been “ample and a good proposition for insurance companies,” Wanat said.
For Arthur J. Gallagher & Co., smaller private clients in particular are paying firmer prices because most only purchase primary policies and not excess policies, said Phil Norton, president of the company’s professional liability division in Chicago.
They are also getting larger percentage increases because of their mix of covered claims, including entity claim allegations such as antitrust and deceptive trade practices, which are more expensive because they are the leading cause of the higher loss ratios.
On the other hand, many larger firms are getting an overall decrease when they add excess, particularly if they are in the right industry, such as manufacturing, Norton said.
“Most manufacturers don’t have any unique risks and they tend to flow with the economy,” he said. “They don’t even have to be making extraordinary profit to be considered a very good risk – they just need to be stable.”
“When things are high, they can fall farther and if there are big stock drops, companies can pretty much count on getting D&O claims.” — Rob Yellen, executive vice president, FINEX North America, Willis
Overall, AJG’s private clients saw an 8 percent to 10 percent price increase in 2014, which has relaxed to 5 to 8 percent increases in 2015 to date, Norton said.
Brenda Shelly, Marsh’s U.S. D&O product leader in New York City, said that, while excess rates for Marsh’s public company D&O polices have been declining since their peak in the fourth quarter of 2012, primary ABC rates are firming.
However, since lower excess prices offset primary market increases, companies with good risk profiles were still able to achieve overall program decreases each year, she said.
“In the private and nonprofit spaces, we continue to see rate and retention pressure, which we expect to continue for the next few quarters due to very broad coverage and historical low rates at the same time they were experiencing serious claims for the past few years,” Shelly said.
Jeffrey R. Lattmann, executive managing director, executive liability at Beecher Carlson in New York City, said that the clients that have had flat pricing on primary have had consistently well-managed, good financials, while the clients that have seen increased premiums have had material changes in risk, adverse development in their financials and claims paid.
Smaller companies, which have employment practices liability built into their D&O policies, are facing headwinds if they operate in California, Lattmann said. “If they have any employees in California, they are experiencing higher pricing and higher retentions, as it’s the toughest state to underwrite with all of the employment litigation.”
According to Willis data, public companies have seen less upward pressure on rates, although rate increases are likely for health care companies, homeowner/condominium associations, educational institutions and nonprofit entities.
For financial institutions, Willis is seeing small decreases on primary coverage, with slightly greater savings on excess. For companies that have yet to see relief from credit crisis increases, particularly financial guarantee companies, rate decreases could be as large as 25 percent.
“In the end, I don’t think the financial crisis was as scary from a D&O insurer perspective as many expected,” said Rob Yellen, executive vice president, FINEX North America, Willis in New York City. “While we’re still seeing bankers get sued when their banks failed, the amount of claims were not nearly as bad as many thought they were going to be.”
Looking forward, Yellen said, the D&O market is “at a crossroads.”
“We’ve had a relatively stable slow-growth economy and now have a pretty high stock market at or near 52-week highs,” he said. “When things are high, they can fall farther and if there are big stock drops, companies can pretty much count on getting D&O claims.”
Those companies are also facing challenges as the Federal Reserve appears ready to raise rates at any time, and a strong dollar is making it harder for U.S. companies to make money outside the U.S., Yellen said.
Moreover, the SEC is now focused again on accounting fraud, which typically hits D&O harder than insider trading.
“So while clients may see a bit of price relief this year due to competition, D&O exposure seems to be getting worse,” he said.
Small and medium-sized independent brokers face an ever-increasing battle to maintain their independence, according to industry experts.
A growing number of independent brokers are being swallowed up by big publicly traded firms and private equity (PE), with nearly 60 deals completed in the first two months of this year alone.
The recent upsurge is being fueled by hungry capital-rich investors keen to tap into a lucrative market and by the need for larger brokers to increase scale through mergers and acquisitions.
According to one market insider, it has reached the point where today it is tougher than ever for firms to stay independent.
Phil Trem, senior vice president at consultancy firm MarshBerry, said that is because many companies don’t have a natural successor in place to continue the business.
“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.” — Phil Trem, senior vice president, MarshBerry
“Most firms want to retain their independence but the practicality of that is limited,” he said.
“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.”
He added that most independent brokers or agency owners are worried that if they sell or merge their company, they will lose control of its ability to grow.
“It may seem trivial but most of the owners have not had a boss in many years — the thought of working for someone is hard to contemplate,” he said.
For those that do decide to take the plunge, he said, the two biggest influencing factors to consider are the effect on the company’s corporate culture and access to resources once the deal is completed.
“After all, sellers only want to make sure they can gain a competitive advantage in the marketplace to help themselves and their staff be more successful,” he said.
However, in the face of increasing consolidation, some independent brokers have stood firm and managed to maintain their independence — and many of them believe they are better for it.
With an estimated 429,101 insurance brokers and agencies in the United States, according to the latest research by IBISWorld, it’s no surprise that some firms are natural takeover targets.
Last year, 321 deals were announced, up 43 percent from the previous year, and only four off the record high of 325 in 2012, according to MarshBerry.
That trend is only set to continue through 2015, driven by new demand and the formation of the National Association of Registered Agents and Brokers (NARAB), enabling agencies to compete on a national basis.
Added to that, increasing financial and regulatory burdens are forcing many businesses to sell up or merge just to survive.
While the prospect of partnering with a larger firm can seem attractive at first, offering access to wider markets and the ability to go after bigger and more complex accounts, it can also result in layoffs and office closures, as well as having to tear up entire technology platforms.
So it’s easy to see why some brokers are reluctant to become part of a bigger company and why they are so keen to maintain their independence.
David Lockton, chairman of Lockton Cos., the world’s largest privately held independent insurance broker, said that the key advantage to being independent is the ability to report in to one person and not to be held to account by a group of shareholders, or PE or hedge fund.
“At the end of the day, I want my team of lawyers, accountants and business and risk management consultants reporting in to me, not a group of public shareholders,” he said.
“Being independent means that they can do that and that they aren’t encumbered by other stipulations such as profit centers and quarterly margin requirements.”
John Lumelleau, president and CEO of Lockton, said that being independent also enables brokers to focus solely on their clients’ needs rather than worrying about other distractions.
“Many organizations that were maybe once independent and have become part of a larger company or bought by private equity have had their whole structure and dynamic changed as a result,” Lumelleau said.
“Remaining independent, however, enables you to maintain your connectivity with your clients, which disappears to some extent when you are working for or are owned by somebody else.”
Lockton has been regularly voted in the trade press as the best insurance brokerage to work for, and David Lockton believes that is due to the firm’s culture of empowerment, which wouldn’t be possible if it was part of another company.
“We’re not about financial engineering,” said Lockton. “Our scorecard is not about top line revenue or margins. It’s about winning and keeping customers, which is something that has served us very well from a financial standpoint too.”
Lockton added that the company’s strategy is focused on organic growth through the acquisition of new clients and it would only take over another firm if it shared the same values and type of culture, sticking true to its independent philosophy.
David Walker, president of Hartland Insurance Agency and chairman of the Insurance Agents & Brokers of America (IIABA), said that the main benefit of being independent is the flexibility and capability it allows.
“It provides you with the flexibility to represent multiple carriers in multiple markets and the ability to access all of them on behalf of your customer and to determine where that business gets placed,” he said.
Walker, however, believes that it’s a different story for those independent brokers and agencies with revenues of between $1 million and $2 million who face the critical decision of whether to sell up or grow their business, due largely to economies of scale.
“There’s going to be pressure put on them by insurance carriers and by the marketplace, forcing them to decide whether to expand their business or sell up,” he said.
John Hahn, co-founder and CEO of California-based EPIC Insurance Brokers & Consultants, said that independence has enabled his company to build a platform and culture that allows its employees to prosper.
“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together,” he said.
Hahn added that being independent also ensures that clients’ interests and company practices remain uncompromised.
“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together.” — John Hahn, co-founder and CEO, EPIC Insurance Brokers & Consultants
Barnaby Rugge-Price, director, RK Harrison property and casualty — whose company, in March of this year, announced a merger with Hyperion Insurance Group to form the world’s largest employee-owned, independent insurance and reinsurance broker — said that independent brokers have the added advantage of attracting the best talent in the market.
As a result of that talent taking ownership of the business, he said, clients naturally expect a higher level of service from their broker.
“For us, independence means two things,” he said. “Financial independence leaves us free of outside control and allows us to make long-term decisions that are right for our business and for our clients.
“It also means that we are independent of any broking presence in the U.S. This allows our partners to have confidence that our interests are aligned with theirs — the best deal for their clients.”
Added Rugge-Price, “The Hyperion/RKH merger demonstrates that independents can continue to thrive but the bar is being raised all the time and in the face of a prolonged soft market, an ever-increasing burden of regulation and a consolidating client base, the next few years will be a test for everyone involved.”
David Howden, CEO of UK-based Hyperion Insurance Group, added that central to the new company’s success would be its ability to maintain its corporate culture.
“If there’s one thing I fight hardest to retain as our business develops, it’s the entrepreneurial dynamic and enterprising culture of our business,” he said. “Therefore, we are focused on the needs of our clients, not on internal politics.”
While M&A may be on the increase, with more firms changing hands, for many of those in the independent brokering market, the benefits of staying independent far outweigh becoming part of a larger company.
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact email@example.com.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.