NU's E&S/Specialty Lines Extra

But readers looking for an article about the passage of afederal surplus lines reform bill or the return of hard-marketpricing will have to wait to 2010 at the earliest, experts say.

Below we digest the last seven of the Top-10 stories impactingthe surplus lines and admitted specialty markets in 2009. (Therecap of the top-three stories are in this edition's leadarticle.)

#4: It's The Economy, Stupid

While it might be impossible to locate a single issue ofNU's print magazine this year that doesn't mention theimpact of a down economy on the top lines of carrier and brokerincome statements, articles in the E&S Extranewsletter branched out from discussions of exposure declines thattanked revenues.

Several newsletter articles addressed two other economicimpacts--the potential for increased claims activity, andopportunities for E&S/specialty insurers to cover new risks notbeing taken up by traditional insurers.

Addressing the opportunities, Robert Lala, a senior vicepresident for Liberty International Underwriters, said that in thecurrent economy, commercial enterprises may be more exposed to twosources of uninsured risks--financial difficulties of key businesspartners and their own decisions to expand into unfamiliarareas.

Throughout the downturn, E&S insurers continue to offercoverage for the toughest risks--new and unfamiliar products--aswell as higher limits of excess liability coverage, he advised inan exclusive article he authored for the September newsletter.

In addition to businesses, some specialty insurance marketparticipants are crafting policies to help individual consumersdeal with consequences of a down economy.

NU Associate Editor Phil Gusman reported on one suchoffering in our January edition--from automaker Hyundai,underwritten by Cincinnati-based Great American Insurance Group.The offering, said to be unique in the United States, allows carbuyers to return cars and cancel their auto loans if they losetheir jobs or experience any other covered event.

Job losses, particularly among an ever-expanding population ofaging baby boomers, were top-of-mind problems for participants inthe fiduciary and employment practices liability insurance thisyear, as broker and carrier executives revealed in special reportsin the June and November editions of this newsletter andNU magazine.

Specialty insurance executives said they were already bracingfor an onslaught of lawsuits before last year's meltdown in theglobal financial markets.

The economic downturn is adding "new dimensions to the mix,"added Paul Slamar, managing director and fiduciary liabilityinsurance product leader for Aon Financial Services Group inChicago. Plant closings, divestitures and layoffs are contributingto growth in the ranks of voluntary and involuntary former benefitplan participants, he said.

Cathy Padalino, vice president and EPL product manager for Chubb& Son in Warren, N.J., offered a similar assessment on the EPLfront. "Just simply based upon the demographic makeup of the babyboomer generation, the odds are higher and higher as the clockticks that someone [losing his or her job] is going to be of [that]protected class," she said.

Mr. Slamar said the current economic environment, together withplaintiff-friendly court rulings of recent years, "could simplifythe means by which competent plaintiffs' firms conversant withERISA can seek to pursue class actions on behalf of formerparticipants," he said.

In contrast, Ms. Padalino and other EPL experts pointed to somefactors potentially mitigating the severity of claims for EPLinsurers, including the widespread use of severance agreementscurbing rights to sue.

EPL and fiduciary liability experts alike, however, said theyare keeping a watchful eye on the activity in the courts, as wellas reactions from a new administration in Washington and federallawmakers, pointing to signs that all three government branches areraising the stakes against them.

Stay tuned for more in Item #6 below.

#5: The Hard Market Minute

Like NU's print magazine, the specialty newsletter didinclude a number of reports on shrinking revenues of insurers andbrokers--mainly focusing on the impact of soft-pricing conditionsthat continue today in many segments.

Reporting on A.M. Best's analysis of the E&S market, ourOctober edition said the rating agency tallied a second-consecutiveyear of falling U.S. surplus lines premiums--a 6.2 percent drop in2008, following a 5.3 percent decline in 2007.

The last time premiums fell for two years straight was back in1988 and 1989, when the drops were 4.3 percent and 2.5 percent,respectively, rating agency analysts reported in their latestupdate on the state of the surplus lines market prepared on behalfof the National Association of Professional Surplus Lines Offices,Ltd.

In the report, which was delivered during NAPSLO's annualconference in October, the rating agency also tallied direct U.S.premiums written for a subgroup of the E&S market it refers toas domestic professional surplus lines insurers--U.S. insurerswriting more than half their direct premiums on an E&S ornon-admitted basis.

The $24.8 billion premium total for domestic professionals in2008 was a full 11 percent lower than the $27.7 billion figure for2007, marking the first double-digit drop for domesticprofessionals since 1988.

"We said a year ago that we really anticipated the market havinga definitive change--some sort of a hardening by this point," DavidBlades, a Best senior financial analyst, told NU,revealing one of the most surprising conclusions of his research."The more people we talk to, the more we realize how far that'sgetting pushed out now," he said, noting that many marketparticipants don't see a turn happening until late in 2010.

A dozen E&S carrier and broker executives who spoke toNU at NAPSLO and in the days leading up to the eventconfirmed the view, and generally said that momentary signs of astabilizing or turning market, particularly on the casualty side,came and went in an instant sometime around midyear.

"After that, pfft, I have no idea" what happened, said LIU's Mr.Lala, summing up a consensus view that was more typically expressedwith shrugs, head shakes, sullen looks and downward stares.

Supplementing bad market-pricing news overall with individualreports on various segments of the E&S business, ournewsletters included headlines like, "Hard Umbrella Market NowhereIn Sight" and "Capacity Trumps All Other Issues FuelingPersistently Soft D&O Market."

Occasionally, we did deliver reports on the limited number ofhard-priced sectors, like directors and officers liability forfinancial institutions and the aviation and energy markets. Buteven market participants in one of the hardest markets--Gulfenergy--hit a stumbling block, we reported in the Augustedition.

"Gulf Energy Risks Ditch Cover As Buyers Balk At Price Hikes,"the headline of that article read. "We scared a lot of clients intoself-insurance by [requiring] huge premium dollars, where it mighthave been more intelligent...to focus on coverage," said RichardBrindle, group chief executive of Bermuda-based LancashireInsurance, describing problems energy insurers encountered atmidyear.

#6: A New Administration, A New TortEnvironment

What the courts giveth, the other branches of government takethaway.

That might be an appropriate way to paraphrase the messages thatEPL and fiduciary liability insurance experts delivered in the wakeof what seemed like favorable court 2009 decisions for thedefendants they typically cover.

"While employers may win the battle, they may lose the war onthis one," Jack McCalmon, a partner with the law firm of Titus,Hillis, Reynolds, Love, Dickman & McCalmon PLC in Tulsa, Okla.,said in an article leading off our June edition.

A day after a U.S. Supreme Court ruled in Gross v. FBLFinancial that a worker has the burden to prove age was thekey factor in a negative employment decision, Mr. McCalmon referredto the prospect for congressional action to overturn thepro-employer ruling in a continuing battle of one-upmanship betweenlawmakers and the court.

The Supreme Court decision was close, with a 5-4 ruling onlyslightly favoring employers, prompting strongly worded dissentsfrom minority justices and immediate outcries from CongressionalDemocrats.

"The decision...reminds me of the court's wrong-headed ruling inLedbetter. In fact, it was these same five justices whomisconstrued an employment discrimination statute in that case,"said Sen. Patrick Leahy, D-Vt., comparing the Gross rulingto the mid-2007 pro-employer decision in Ledbetter v. GoodyearTire & Rubber Co.

The Ledbetter case, involving a 180-day limit forbringing employment actions over discriminatory pay decisions,prompted the first action by Congress after President Barack Obamawas inaugurated. The president signed The Lilly Ledbetter Fair PayAct into law on Jan. 29, clarifying that discriminatory paydecisions occur each time compensation is paid--essentially, withevery paycheck.

President Obama's administration has already given clear signalsthat there will be a strong emphasis on the rights of employees,noted Aon's Mr. Slamar, drawing a parallel between theLedbetter situation and political backlash emerging in anemployee benefits case that has not yet been heard by the SupremeCourt but is headed in that direction.

Although a favorable ruling for fiduciaries was affirmed by the7th Circuit Court in an excessive 401(k) fee case known asHecker v. Deere, Hecker plaintiffs have since filed apetition for a review by the U.S. Supreme Court.

In addition, U.S. Rep. George Miller, D-Calif., chair of theHouse Education & Labor committee, introduced the 401(k) FairDisclosure & Pension Security Act of 2009, requiring greaterdisclosure of fees for service providers that offer investmentalternatives for plan participants, Mr. Slamar reported.

(More details of the specifics of the original court case arecontained in a separate article later in this edition, "PonziScheme Cases On Deck After Recent Plaintiff Score On 401(k) FeeCase.")

Mr. Slamar noted that Rep. Miller had introduced similarlegislation late in the Bush administration that did not gain muchtraction, predicting the outcome might be different with a newadministration in place.

Sounding a louder alarm during the Professional LiabilityUnderwriting Society international conference last month, RobertHartwig, president of the New York-based Insurance InformationInstitute, predicted a looming tort crisis that he said started totake root two years before the 2008 presidential election.

"Once Congress turned Democratic in 2006, this was basically thedate on which there would be no more tort reform for the indefinitefuture in the United States," Mr. Hartwig asserted. Now, "we're noteven seeing protections of existing reforms," he said, alluding tothe potential erosion of past class-action reforms.

"Innumerable legislative initiatives are going to be createdthat will provide opportunities to undermine existing reforms andto develop new theories of liability," he continued, referring tothe potential for increased health care liability claims andemerging suits alleging that carbon dioxide emissions arepollutants.

Changes in the judiciary will "also move things in the wrongdirection" for insurers, who are historically hurt by rising tortcosts, he said--going on to predict "there will be a recognition ofa tort crisis somewhere between 2012 and 2014."

For specialty market participants waiting for a hard market,there is one silver lining in Mr. Hartwig's prediction. At theoutset of his presentation, Mr. Hartwig noted that no previousmarket turn had come without "a change in the perception of risk,"which a "tort crisis" might presumably deliver.

"A precipitous drop in industry capital is not enough. You needa change in risk perception," he said, explaining why the marketdidn't turn following last year's capital nosedive. "A drop incapital is a necessary, but not a sufficient condition to get ahard market," the economist added.

#7: Old Players Reinvent Themselves

When we compiled our top-10 story list a year ago, we included areference to 2008 profiles of five new competitors in the U.S.E&S and specialty lines markets that had roots in Bermuda.

In contrast to the list of new names like Montpelier US,Ironshore Insurance and Valiant Insurance, this year's crop of newplayers--if you can call them that--are some of the oldest names inthe business.

The only two E&S company profiles in our newsletter wereabout existing players that are in the midst of reinventingthemselves--Lexington Insurance (which is shaking off the AmericanInternational Group banner to emerge under the Chartis umbrella),and CNA (where the E&S division has taken on a new brand aswell, calling itself CNA Select Risks).

Leading the CNA team, industry veteran John Angerami said thatputting a new label on the E&S business was just one small stepin an ongoing building process.

During an exclusive interview published in our July edition, hewent on to outline plans to double the number of wholesale brokerpartners and double the number of employees dedicated to theE&S unit--plans he's developed just three months after joiningan insurer he believes has an unusually broad E&S appetitesitting within a retail organization.

More recently, Peter Eastwood, who heads up the nation's largestE&S insurer--Lexington--took a look back at the changes thathave taken place at his firm since he took the helm on Dec. 9 lastyear.

"There's been an evolution in terms of our challenges," he saidin the lead article of our October edition. "As we sit here today,I would tell you that our challenges are similar to the ones thatothers in the business face....Supply is greater than demand, andso we face competition in our business, followed very closely bythe recessionary economy here in the United States."

"AIG and its issues that emanated from the liquiditycrisis,...while still in effect for us as an organization [nowknown as Chartis] are really a distant third for us" at Lexington,he said.

Newer names in the business, like Ironshore, which is now led byLexington's former CEO, Kevin Kelley, were by no means absent fromour newsletters this year.

Representatives of two specialty divisions of Ironshore and onespecialty division of newbie Torus, for example, revealedstrategies to enter the umbrella liability market in our Augustedition.

#8: Is It Hotter In Here? Global Warming LitigationBrings Opportunities

Mr. Hartwig, speaking at the NAPSLO conference, joined a chorusof E&S/specialty market participants who pointed to "greenumbrellas"--coverages for alternative energy sources, naturalresources and environmental risks generally--as sources ofopportunities for niche writers over the next few years. Severalfeature articles this year highlighted these growing sectors of theeconomy

In an August article, for example, Associate Editor Phil Gusmanrevealed that while writers of environmental liability insurancesee threats ahead as they conduct business under an Obamaadministration expected to put more emphasis on heading off climatechange, new insurable risks are also emerging.

New industries emerging to provide alternative energy sources,such as wind and solar power, create new environmental liabilityinsurance prospects, while going green in construction andretrofitting of buildings opens up new markets for coverage, thearticle said. Even cap-and- trade initiatives could allow insurersto cover the validity of exchanges.

#9: Is This National Underwriter OrEntertainment Tonight?

While television shows like "Entertainment Tonight" andmagazines such as National Enquirer and Peoplewere producing seemingly endless reports on the death of a pop iconand the divorce of two reality TV stars, NU did its partto explore the insurance implications of these events in two of themore widely read newsletter articles of 2009.

"Will Insurers Pay For Jackson's Concerts?" one article asked ina July report revealing that the sudden death of Michael Jacksonmight trigger one of the biggest event cancellation claims in theinsurance industry's history.

Experts at the time speculated about details of a medical examthat could muddy coverage determinations for 50 sold-outperformances that had been scheduled by the "King of Pop" atLondon's O2 Arena.

In the same edition, we reported on the "special brand ofexpertise" involved in writing insurance policies for realitytelevision shows in the wake of news that the Gosselins--the starsof "Jon and Kate Plus Eight"--were divorcing. Emotion-based showslike that are harder to plan for than for shows involving strenuousphysical stunts like "Fear Factor," experts advised.

#10: Brokers, Insurers Describe The Most Unusual RisksTo Land In The E&S Market

A more general insurance report involving the entertainmentworld, "Event Insurers Still Play To Full Houses," in the Septemberedition, revealed continued demand for insurance covering eventsranging from bake sales to the Olympics, as well as some unusualactivities in between--such as Velcro jumping event and Airsoftoperations.

But those risks probably seemed like child's play to brokers andunderwriters who responded to Associate Editor Phil Gusman's callfor descriptions of the most unusual risks they wrote orplaced.

His survey resulted in a September article headlined,"Alligators, Body Parts, Fantasy Leagues: All In A Day's Work ForSpecialty Writers," which described coverage for a 30-foot-talllobster sculpture tourist attraction and a cattle stampede for atruck commercial.

It also detailed coverage for a former Major League baseballhome run king's bum ankle--a policy that required the player totake a performance-enhancing steroid as a condition ofcoverage--not to mention coverage to protect fantasy footballowners from season-ruining injuries to their fantasy teamplayers.