Specialty Lines Writers Remain Bullish About Professional Liability Insurance Market

"Settlement costs when you have claims keep growing, and there's no sign of any tort reform that could limit damages from lawsuits any time soon," Mr. Auden said. "The expectation is, if you are in this business, you are going to get losses periodically, but I don't know if the business is now adequately priced to reflect potential losses."

But there are still many industry executives who are keeping a bullish perspective, as seen in the following profiles of some of the nimbler, more recent specialty-lines entrants and they are putting their money where their mouth is, as they continue to devote more of their corporate resources to their professional liability products.

? Darwin Professional Underwriters, a specialty lines unit of New York-based Alleghany Corporation founded in May 2003, continues to expand its businesses in the professional liability market.

Company leaders say market conditions remain largely healthy for carriers as long as they know which areas to target.

Stephen Sills, founder and chief executive of Darwin (and former chief executive of Executive Risk, which is now a subsidiary of The Chubb Corporation in Warren, N.J.), said he and his fellow senior management members decided to kick-start this operation last year because of fertile marketplace conditions for specialty lines carriers back then.

"We are one of very few newer companies I wouldn't call us a brand-new startup any longer, but one of the newer companies in the professional liability [segment] that have expressly come in to write primary and lead excess business."

Mr. Sills acknowledged that since his entry into the market, those favorable conditions he saw last year have "waned a little bit." However, he added, "We believe that a disciplined approach to the marketplace will continue to allow us to grow and where we are writing business, we are comfortable with the quality of what we are putting on the books."

"As we looked around the marketplace, we saw that there was a great need out there and a great opportunity to create products that would fill niches," Mr. Sills said. He recalled that he had noticed people who werem't getting the kind of service and coverage they needed. "So we thought there was an opportunity to start an organization and fill those needs."

Darwin Professional, based in Farmington, Conn., is divided into three major categories.

One is the D&O liability area, which includes publicly traded as well as privately held companies. In this category, Darwin generally targets companies with $2 billion or less in assets, taking care to avoid major Fortune 500 corporations.

The second major category involves errors and omission insurance, including insurance agents' E&O. "There we specialize in writing wholesalers, program managers and MGAs," Mr. Sills said.

Darwin also offers coverage for lawyers' professional liability, mostly for law firms with less than 50 staff attorneys. Mr. Sills added that his company would frequently cover attorneys with practice areas that "most companies are uncomfortable with," involving securities laws, class-action lawsuits and intellectual property.

The health care practice is another major area for Darwin, which offers D&O liability for hospitals and managed-care organizations and E&O for managed-care organizations. Additionally, Darwin writes medical malpractice for hospitals, physician groups and miscellaneous medical facilities.

"I would describe our appetite for that business as very broad," Mr. Sills commented. "Our health care practice has provided a substantial amount of our growth, but we are also doing very well in commercial D&O, insurance agents, and increasingly well in the lawyers' area." While declining to offer premium-volume figures, Mr. Sills noted Darwin continues to add more resources to its business and that the company now has more than 50 staff employees.

Mr. Sills said some of the features that distinguish his company from competitors including market incumbents is its focus on specialty-lines and the expertise of its managers, with 20-plus-years of average industry experience for senior managers and more than 12 years of average experience for underwriting managers.

"I think the marketplace has received our approach to the business quite well. We've received an extraordinary number of submissions since our inception and over the course of this calendar year," Mr. Sills added. "And although the company is new, we are being recognized quite a bit for the individual experienced people we've brought in, and for writing business to the plan we have set for the company."

When asked whether the once-high-flying D&O rates are falling too much too fast, Darwin's senior vice president of underwriting, Paul Romano, emphatically pointed out that such price changes are not a significant factor within market niches Darwin has chosen to concentrate on. "We are focused on small, middle-market segments," Mr. Romano said. "If you look at some of the businesses we participate in for people who have had difficulties or who are in an industry that's having difficulties those products have not necessarily gotten any less expensive."

"Overall conditions seem to be holding up pretty well, and we like them. In this business, there is always something happening that will cause us to need to adjust course," said Mr. Romano.

Also, commenting on the medical-malpractice market, Mr. Romano observed that there are discussions in the marketplace about "things leveling out a bit." But then again, he noted, his company is constantly going out to the marketplace and is identifying the types of business it wants to bring into its book of business. "We are finding that the match of premium to the structures we are putting out there is still quite good," he said.

? The professional-liability market is also looking pretty good to top executives at specialty-lines provider OneBeacon Professional Partners, part of White Mountains Insurance Group. OneBeacon Professional is also a relatively new entrant to the professional liability market, having started its facility less than three years ago.

Randy Oates, chief operating officer at OneBeacon Professional, based in Avon, Conn., noted that his company's total facility written premium on a gross basis for professional-liability products is expected to be more than $100 million this year, substantially higher than $70 million recorded for 2003. "We will continue to grow and also in terms of the number of employees we have, we are up to about 40 employees now," he said.

Mr. Oates noted that OneBeacon's view of the market varies somewhat by product line. "If you look at medical malpractice, we are still seeing good opportunities to write excess hospital professional liability," he said. "Earlier this year, we decided to enter the primary hospital med-mal marketplace, and we've had what I would call a controlled growth. We are looking to be a major player in that. We are looking for opportunities for hospitals where we could be a good fit as their primary carrier."

Another professional liability area where OneBeacon has expanded its resources this year is the long term care marketplace, "because we saw that as an underserved market, especially in certain geographies. There was a demand for new carriers to come in and help solve professional liability needs."

Mr. Oates denied the rumor that OneBeacon may be pulling out of D&O. "No, we are not getting out of the D&O market," Mr. Oates said in an interview but he did acknowledge that his company is taking a firmer stand in certain cases and that in September the company sent out a letter to its producers, saying OneBeacon doesn't like the direction of the publicly traded D&O market.

Mr. Oates noted that the current market pricing in this specific area has rates falling by 20-to-40 percent from expiring prices. "We think that's clearly wrong. We don't agree with it, because there is still enough noise in the system," he said. "We don't think it's justified. So we said to our brokers, 'If you expect us to reduce our prices by 20 percent or more, we are not the right market for you.'"

In the D&O market, OneBeacon's focus now is on health care organizations, Mr. Oates said. In addition to D&O, the company writes medical malpractice for hospitals, long term care facilities and nursing homes on a primary as well as on an excess basis. It also writes managed-care E&O, both primary and excess.

OneBeacon also writes media liability insurance (primary and excess) and HMO reinsurance. "For all of these lines, we are expanding our resources," Mr. Oates commented.

Mr. Oates explained that one of the main reasons OneBeacon started this facility almost three years ago was because it spotted a need in the marketplace for what he termed "creative and intelligent capacity."

"You know, we don't want to be a commodity. We are looking for clients and brokers who are looking for good solutions and long-term strategies to their problems, not a carrier that's in the market and then out of the market," he said.

Mr. Oates said OneBeacon offers numerous strengths to its customers, including A-rated financial strength helped by the backing of its parent company White Mountains Insurance Group and some of the best underwriting resources in the business. "We have people who have years and years of experience in these specific lines of business."

Looking forward, Mr. Oates said in a market like D&O, prices cannot continue to fall when you consider the fact that claims frequency and severity are both up so far this year. "So we are hopeful that the market will correct D&O."

"In our other product lines, we've seen more in the way of stability not necessarily wild swings up or down," he said.

"We will continue to grow," he said. "But just as our D&O strategy showed, we are going to do it only if we can do it profitably. For us, our whole focus is on achieving an underwriting profit."

? Arch Capital Group, formerly of Risk Capital Re, which was re-domiciled in Bermuda and recapitalized in 2001, is also bullish on the professional liability market. The company restarted its life as a specialty-lines insurer and reinsurer including professional liability and D&O, specialty property, excess casualty, construction and health care.

"We restarted for the sole purpose of getting into these lines," said Michael Murphy, executive vice president of professional liability group at Arch Capital. "And obviously our timing was pretty good back then. We saw a gap in the marketplace and started the company to enter these lines," he said.

"I would say we are already among the leaders for the professional liability market, from a starting point two years ago," Mr. Murphy stated.

Arch Capital focuses on large-account D&O, as well as E&O for financial institutions including insurance companies, investment advisors and mutual funds.

It also has a group that focuses on "emerging markets," which writes high-tech companies and smaller, private and non-profit organizations.

In addition, Arch offers professional liability coverage for architects and engineers, large law and accounting firms, and miscellaneous professionals such as large-systems consultants.

The carrier has a group devoted entirely to sponsored agents of major property-casualty and life companies, such as Farmers Group. "We insure all their agents?12,000 of them," noted Mr. Murphy.

"We run the gamut in professional liability and D&O. On a net basis, we will probably do $300 million in net premiums written in D&O, E&O lines in 2004," he said.

Additionally, Arch offers medical malpractice coverage from its St. Paul, Minn.-based health care group. That group focuses primarily on hospitals and various medical facilities including diagnostic centers with some $40 million in net premiums expected for this year.

Mr. Murphy touted the virtues of a specialty lines company with a narrow focus like Arch Capital, as compared to giant multi-line carriers.

"Customers always ask, 'How do I know you are going to stay in this business?'" he said. "That's a fair question when you point it at multi-line carriers." On the other hand, he said, "you can count on us to be in this business because that's what we do, and because we are smaller, we are likely to be more responsive to customers."

Looking at current market conditions, Mr. Murphy observed that in terms of pricing, D&O rates are softening "certainly more quickly than we would like."

In E&O, overall rates aren't softening as much they lie somewhere between stable and slight declines. But then again, they never got all that hard to begin with, Mr. Murphy noted. Both D&O and E&O are "still reasonably good markets but we sure hope the rest of the market doesn't race to the bottom on D&O," he said.

On medical malpractice coverage, Mr. Murphy currently sees hospital pricing as "a little softer than it should be."

"While we aren't allowed to encourage our competitors to raise prices, certainly the lessons of the 1990s shouldn't be so easily forgotten," Mr. Murphy said.

But all in all, Mr. Murphy said he is not all that worried about professional liability market softening too quickly. There used to be times, he remembered, when prices could soften rapidly because insurers' investment portfolios continued to spin off money. "That just doesn't exist now. You either make money off underwriting, or you don't make money. Nowadays there's just not nearly enough investment income to make up for bad pricing," Mr. Murphy said.

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 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.