Directors & Officers
D&O reinsurance rates were flat slightly at the January 1, 2012, renewal, despite small rate increases on some primary and lower excess insurance layers in recent months. Pricing was more competitive on higher excess insurance layers and is down approximately 10 percent year over year. For 2012 modest price increases in primary and first excess insurance layers are likely, especially in light of rate changes over the past few months. Rate decreases on excess insurance layers will be smaller, resulting in a net flattening. Small and medium-sized businesses are likely to follow the same trajectory.
The financial institutions sector is once again in the spotlight for D&O reinsurers as a result of the MF Global bankruptcy. Continued economic uncertainty, particularly in Europe, has led to unease among reinsurers that expect losses to be imminent.
Insurance pricing on D&O is more favorable to insureds than reinsurance pricing is to cedents - primarily because of supply and demand. There are many companies writing D&O policies, with far fewer reinsurers writing D&O treaties.
For proportional treaty, there were some slight increases to commissions when insurers were able to demonstrate continued profitability and communicate a clear strategy of risk selection, limits, usage and attachment points. Nonetheless, the majority of ceding commissions renewed as expiring.
D&O reinsurers were cautious about deploying capacity, and there appeared to be more interest in the private and not-for profit sectors, as well as small-and medium-sized publicly traded companies. There have been a few new entrants to the D&O reinsurance sector, however, they have been cautious in their approach and have been careful not to undercut the established D&O reinsurers.
Errors & Omissions
Reinsurance rates varied at the January 1, 2012, reinsurance renewal for errors and omissions (E&O) carriers. The specific risks covered and program loss experience were the primary drivers of the rates secured.
In the primary market, E&O rate changes varied by product and segment. Some lines are starting to renew at an increase of 5 percent or more, particularly smaller law firms. Other lines are still competitive, however, lines for mid-sized law firms, consultants and other miscellaneous (MPL) classes are down 2.5 percent to 10 percent, depending on the risks covered. This is being driven by the historical profitability in these segments and the number of carriers in these product lines. In 2012 rates are likely to trend up modestly, with changes ranging from down 5 percent to up 5 percent on average.
Economic conditions are driving loss activity for the E&O products. In lawyers professional liability (LPL) and real estate-related area of practices, especially those firms involved with commercial transactions, insurers are seeing more losses. Real estate E&O has continued to be a concern, with potential latency issues coming from the collapse of the mortgage and housing market. In architects and engineers (A&E), insured’s own billings have decreased significantly leading to lower premiums, which, coupled with rate decreases, has increased the pressure on the profitability of this product line.
Regulatory developments have had a distinct impact on the technology E&O market, with notification of security breach requirements coming for companies involving personal information that may have been compromised. Insurers are now offering protection for these events, which is driving a broadening of coverage in this class. This is also one of the primary drivers for increased limits being purchased, particularly by some of the larger technology firms. With exposures continuing to emerge and with the publicity of recent data breaches, reinsurers are focusing closely on this class of business.
In terms of subject base exposure relative to premium, the E&O market was flat as new buyers are starting to replace premium lost as a result of rate decreases. As the economy continues to recover, we would expect classes tied to macroeconomic trends, such as contractors, small technology firms and architects and engineers, to have increased premiums as a result of increased original business activity.
Reinsurance rates for per risk working layer programs ranged widely - from down 7.5 percent to up 7.5 percent based on loss history. Structures were affected by the fact that insurers are still looking for premium savings, and reducing reliance on reinsurance is the best way to do this. However, there is more pressure to reduce pricing rather than retain more net risk than in past years. This seems to be the case because the underlying profitability is becoming marginal as a result of lower pricing. Additionally, cedents are purchasing more facultative E&O cover - they may not want to buy treaty, but they do want to start hedging their portfolios given current pricing conditions. Capacity for per risk reinsurance has increased, with newer entrants and increased activity from those already participating in the market.
Reinsurers and insurers have a misalignment in pricing for several sub-classes of E&O, LPL in particular. Reinsurers typically have LPL running 10 to 15 points higher from a loss ratio perspective than primary writers. For other classes, such as MPL and A&E, reinsurers typically select 10 point higher loss ratios as well.
The primary difference between the January 1, 2012, reinsurance renewals and those of a year earlier is that there appears to be more capacity in these products as some of the underlying trends start to move positively. Additionally, the business strategy for how the cedent will execute in the next 12 months, which many view as a potential inflection point in the insurance market, has become critical.
There have been some trends to increase nets for proportional treaty, driven by a desire to save on ceded premiums. In some instances, there has been an increase because cedents were unable to secure full capacity at improved terms. That being the case, for E&O lines, many treaties are excess of loss - and fewer are quota share - because underlying loss ratios plus an adequate ceding commission often do not produce the economic benefit the cedent seeks. Not coincidentally, capacity has decreased because reinsurers do not view the quota share market as meeting their target returns. Finally, many cedents purchased E&O with D&O, which is a key driver for limits and reinsurance capacity.
Cedents are pushing for increases in ceding commissions due to expense ratio increases caused by lack of premium growth. Reinsurers have resisted increasing cedes, but they have agreed to them in certain cases, where loss experience has been excellent. Even then, though, increases are a third to half of what was being sought.
Medical Professional Liability
At the January 1, 2012, reinsurance renewal, rates were flat for medical professional liability (MPL) working layer and high excess programs. A majority of ceding companies attained modest reduction in reinsurance costs fueled by a decline in their premium base, which, in turn, was caused by a further softening of original rates and a reduction in exposures.
In the primary MPL market, premiums declined at a low single-digit rate in 2011, caused by base rate decreases, increased use of rating credits and changes in underlying exposures. The primary MPL insurance market is projected to produce an underwriting profit in 2012. Calendar-year results are bolstered by industry loss redundancy and the favorable development of prior accident years. We expect the trend of provider consolidation to continue in 2012, as well as further M&A activity among MPL insurers.
Claims frequency remains flat at record low levels, down almost 50 percent from the early 2000s. Claims severity continues to increase at moderate levels. Losses in excess of policy limits and bad faith claims continue to be problematic in several jurisdictions, coupled with several reports of “systemic,” or batch, claim losses sustained by MPL insurers.
For excess of loss covers, pricing was as expiring for both working layer and high risk excess programs at the January 1, 2012, reinsurance renewal. More MPL insurers elected to purchase casualty catastrophe reinsurance coverage at renewal that affords protection against losses in excess of policy limits, bad faith claims, clash losses or systemic risk events. A minority of MPL insurers have elected to increase their net retentions in recent years.
The coming year will be a challenging one for MPL insurers. We can expect further softening of premiums per exposure and additional provider consolidation. The plaintiff’s bar has been emboldened with the rollback of tort reform measures in both Illinois and Georgia, along with challenges pending in Florida and other states. Moreover, the constitutionality of the Patient Protection and Affordable Care Act will be decided by the US Supreme Court. This decision will impact the delivery of healthcare in the years to come.