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Professional Liability on the Line

Will it become easier for underwriters to turn a profit in the professional lines market?

Former British Prime Minister Tony Blair will headline the Professional Liability Underwriting Society's annual conference in November in San Diego.

As one of the key players over the past couple of years in the attempt to craft an Israeli-Palestinian peace agreement, Blair will address this year's conference theme of "Your Global Neighborhood: Explore, Connect, Evolve," which will demonstrate how world events are rapidly changing the global insurance marketplace and the professional liability sector in particular.

Jeff Lattmann, incoming PLUS president and a New York City-based Beecher Carlson managing director, said that having such an internationally known figure such as Blair "will help move this beyond what has always been such a U.S.-centric conversation."

While the organization has in the past hosted leaders such as former President Bill Clinton and Secretary of State Condoleezza Rice, Lattmann said Blair was the first foreign leader of such stature to speak to the organization.

The conference, to be held Nov. 2-4, comes at a time when professional liability underwriters must confront the twin threats of rapidly evolving risks as well as a market that doesn't provide the returns believed adequate to protect against those risks.

For example, directors' and officers' (D&O) underwriters today face a number of global challenges such as those stemming from the Foreign Corrupt Practices Act, and the increasing likelihood of intervention from the U.S. Justice Department and the Securities and Exchange Commission. "We will also explore the exploding liabilities stemming from social media outlets," Lattmann said.

With the volume of capacity that is currently available, Lattmann said the carriers might argue they can no longer make any money on professional liability coverages. "And there are just not that many reserve releases left to bolster the bottom line of insurance companies," he said.

Lattmann added that the situation has deteriorated to the point where carriers are looking at renewals on a case-by-case basis.

"Because if they let them go, how many do they let go, and how much can they shrink before they think they can get their money on an increase or flat renewal," he said.

Robert Hartwig, president of the New York City-based Insurance Information Institute, will give his take on the challenges facing not only professional liability underwriters but the industry in general as it struggles to achieve some sort of sustained underwriting profitability.

As for the lines that include directors and officers, medical malpractice as well as malpractice for any number of professions such as legal, accounting and architecture, Hartwig said the "market never got as hard as we thought it would as a result of the financial crisis."

"I think that was a surprise to many. But that being said, there have been some large scale D&O claims that have come out of the financial crisis -- over how the Lehman proceeds will be used, for instance," he said.

In addition, losses could mount from claims stemming from the Bernie Madoff scandal and other issues that occurred during, and as a result of the financial crisis. "But the reality is the market is soft like much of the remainder of the property-casualty insurance marketplace," he said.

"So the question now is where are we going forward, and for that it is important to look at such things as capacity in the industry, related to reinsurance, whether there will be spillover from the large-scale losses we have seen elsewhere on the property side," Hartwig said.

As for reinsurance capacity, Standard & Poor's analyst Laline Carvalho said that casualty, with its consistent soft pricing and which includes professional liability coverages, remains the problem child for reinsurers.

"Casualty pricing has been declining for several years and it has gotten to the point that many reinsurers are not even attempting to write that business," she said, in public comments at the June Standard & Poor's industry conference.

Speaking at the same forum, Partner Re President Costas Miranthis said any significant upward price movement is at least two years away and would require some serious reserve charges to get that ball rolling. "But at least there is no downward pressure," he said.

Hartwig took a dim view of any market firming because of his observation that secondary writers are walking away from seemingly unprofitable business. "Everyone says they are walking away, but somehow the capacity remains and the prices fall," he said.

Hartwig said it is important to look at the overall factors that will be needed to turn the market.

The MarketScout Barometer edition published last month hailed what it saw as the beginning of the end of the soft market by noting price hikes in property catastrophe and workers' compensation lines. Professional liability and directors and officers lines, however, remained flat, according to the barometer. Among the professional liability lines, only employment practices liability insurance showed any increase, and that was a small one at 1 percent.

Lattmann even challenged the flat characterization of the market by noting he has been obtaining rate reductions. "Underwriters have the sense they are hitting bottom, but apparently there is still farther to fall," he said.

The severity of the hurricane season that ends in November and its effect on catastrophe prices will be important. But other more long-range trends will also play key roles in determining if the price slide comes to a halt.

"Here we are a decade after Sarbanes-Oxley and just a year after Dodd-Frank, the question we have to ask is, is the industry better or worse after these two landmark pieces of legislation that were really bookends to a decade of scandal," Lattmann said.

The Sarbanes-Oxley Act was passed in 2002 in the aftermath of the Enron collapse and promoted greater transparency in financial reporting. Dodd-Frank, signed into law in July of 2010, overhauled financial regulation.

"Sarbanes-Oxley was more directly related to corporate governance and some people wonder why Sarbanes-Oxley did not prevent the collapse of 2008 and 2009," Lattmann said.

Hartwig said it is arguable the D&O underwriters benefitted from the increased scrutiny around corporate governance that came about as a result of Sarbanes-Oxley. "The question is will we see a similar benefit as a result of the Dodd-Frank reform," he said.

While Sarbanes Oxley was meant to address accounting fraud, "when you boil it down, Dodd-Frank is legislation about risk management.

"So the question is does this financial legislation that really attempts to control risk in the financial sector, will it influence directors' and officers' underwriting?" Hartwig said. "I think it is too early to say at this point."

Many business leaders have apparently already made up their minds, according to a survey conducted last summer by the accounting firm BDO USA LLP. A total of 61 percent of board members of companies with between $250 million and $750 million in annual revenues think their liabilities have increased over the past year, with a great majority expressing concern about the whistleblower provisions in Dodd-Frank and its companion Consumer Protection Act.

Moreover, Marsh recently reported that companies are seeking to alleviate these new concerns by taking advantage of the soft market to increase their directors' and officers' coverage limits by significant amounts. Lattmann said he and other brokers have been able to wrest more favorable terms and conditions from carriers in this market.

On a positive note, Hartwig said that the judicial climate for businesses and their insurance carriers has improved somewhat over the past decade with the passage of some tort reform measures in states and at the federal level. "And the number of shareholder suits is not out of control despite the surge in the deepest, darkest days of the financial crisis. That is something else that did not take off the way people anticipated," he said.

Still, the challenges remain to the point that Lattmann sees some shaking out lurking in the not-too-distant future that could diminish the ranks at next year's PLUS gathering. "Time is going to challenge us in this arena. Something has got to happen at some point," he said.

November 1, 2011

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