Reinsurers Open To E&O Opportunities,But Struggle With Employment Practices

With more frequent severe directors and officers liability claims reaching into the high excess layers of reinsurance treaties, are reinsurers moving business out of directors and officers and into other professional liability specialties?

In some cases, reinsurance treaties just cover D&O. More often, however, treaties might also include all management assurance coverages–fidelity, fiduciary, employment practices liability and D&O, and occasionally errors and omissions, said Sean Whelan, a managing director at Guy Carpenter and Company in New York. Where the coverages are all put under one treaty, the trends that have affected reinsurance prices and terms for D&O business are affecting the other lines as well, he said.

Turning to situations where professional liability (E&O) is separately reinsured, he noted that “professional liability results have not been quite as disastrous as D&O. There, we have not seen a sudden surge in frequency [of severe claims] as we have in D&O. So my gut reaction is that theres less contraction with E&O.”

However, he added that “on the other hand, EPLI results have been poor and thats largely a function of frequency,” noting that an underlying driver of higher loss frequency is the fact that policyholder retentions were set too low on primary policies during the course of the soft market.

Agreeing that increased claims frequency would not typically affect excess-of-loss reinsurers, Mr. Whelan noted that because EPLI is a newer line of business, more EPLI contracts have been reinsured on a pro-rata basis, “so the frequency issue has affected reinsurers.”

Richard Betterley, president of Betterley Risk Consultants in Sterling, Mass., said: “There has been a real challenge for the EPLI companies that have been at it for a number of years that have a mature book of business. Theyre having a very hard time making money at it,” he added, referring to primary insurers participating in this specialty market.

“Some of the leading [insurers] are now putting much higher retentions on the big insureds and, I wouldnt say that theyre non-renewing, but theyre forcing the retentions up substantially,” Mr. Betterley said.

Where there was a $1 million retention, now its going to be $5 million, “which is a whole nother world of retention,” he said, noting that reinsurers are not only pushing for higher retentions and rates on underlying primary policies, but also pushing up retentions and rates on reinsurance treaties covering EPLI.

He noted that 40 percent was the typical increase in EPL reinsurance prices. “I have also heard that some of the reinsurers, particularly the Lloyds syndicates, instead of backing [EPL insurers] are moving their capacity to professional liability or errors and omissions-type lines,” he said. “Thats simply because they think they can get much higher rates there,” he added, agreeing with the theory that EPL insurance is more price-sensitive than E&O.

Bonnie Boccitto, senior vice president in charge of the specialty lines department of American Re in Princeton, N.J., said her company is seeing some worsening experience on its lawyers E&O book. “And as opposed to D&O, we have not seen the significant hardening of the market in the lawyers area,” she said.

Unlike the situation in D&O, where reinsurers point to a 1995 legislative change as a key event behind changing loss experience, poorer experience in lawyers professional liability is simply the result of a continued softening in primary pricing, Ms. Boccitto said.

“Were looking very seriously at our treaties that cover lawyers business. To date, we havent yet non-renewed any,” she said, but added that “we have a number of treaties that cover lawyers coming up for renewal at Jan. 1, and I think thats going to be a very pivotal time for reinsurers relative to the lawyers marketplace.”

In the medical professional liability area, Ms. Boccitto said reinsurers are also seeing some difficult experience. “This is also an area where we have not seen the significant rate increases that weve seen in the D&O area,” she said, noting two exceptions–in the managed care area and for nursing homes. “Those two areas have experienced significant losses out in the marketplace. And hence theyre seeing some tightening,” she said.

Noting that American Re doesnt write a lot of business in those two areas, tightening conditions might prompt the reinsurer to enter “on a very cautious basis,” she said. “That might be on a facultative basis, as opposed to a treaty basis, so we can actually have a little bit more control over the individual risk.”

At CNA Re, Marcia Munn, executive vice president, said: “We are thinking that medical malpractice–not all med mal, but especially the PIAA-type mutual companies–are moving in the right direction,” referring to physician-owned mutuals that are members of the Rockville, Md.-based Physicians Insurance Association of America. “Weve certainly seen improvement there. We see some of those companies taking rate increases two times a year right now.”

With more severe loss experience over the last two years prompting the primary insurer rate increases, reinsurance structures are tightening as well, Ms. Munn said. Noting that a lot of the mutual companies are on swing plans (where rates are adjusted), she said a provisional rate that was 15 percent (of the insurance premium subject to the reinsurance contract) a few years ago, might be 22 percent today.

As for EPL, Ms. Munn said, the only EPL business on CNA Res books “is incidental to the client whos writing D&O. So we dont spend a lot of time focusing on it, because we think its sort of a mine field at this point.”

In addition to writing EPL together with D&O, some D&O carriers are offering some specialty business risk products, such as loss mitigation underwriting contracts (which provide additional limits of coverage for shareholder suits and other losses that are already in progress) and coverage of representations and warranties made in business contracts (such as merger or acquisition agreements), Ms. Munn pointed out.

“Were very, very selective because of an aggregation issue that you can easily have there,” she said. “Those are usually fairly large deals, so that it would be inevitable that you would probably have more than one [ceding company] client on the same claim. So while we may think were only putting out a $2.5 million limit, we may have 2.5 million times [the number of clients on the program].”

“Plus, theyre very, very new products. No one knows how to price them. We have no idea if theres any price adequacy in them,” she said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Reinsurers Open To E&O Opportunities, But Struggle With Employment Practices

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