David Doe warns that rigorous discipline is needed in the professional liability sector.
In spite of a generally encouraging picture for trading conditions across the re/insurance sector, in certain areas market conditions are becoming increasingly confusing to read, not least those surrounding the professional liability sector. We have a number of positive and negative items to work from. Generally the picture is a very up-beat one, trading conditions are very good, and even the economic picture is showing signs of improvement.
As optimists point to the end of much of the world's geopolitical uncertainty, and with corporate profits slowly recovering, even stock markets are moving upwards, albeit at a glacial pace. However, pessimists will highlight the increasing levels of both personal and corporate debt that could easily stymie the slow growth led by consumer spending. But being positive, certain major insurance factors look good, such as the recent rulings in New York that four leading investment banks were blameless for multi-billion dollar investor losses in the bursting of the tech bubble. This alone could have produced monumental losses to professional liability insurers, and as such was a landmark decision.
Nevertheless, having dodged one bullet, the endless round of litigation relative to corporate malfeasance in the US will doubtless produce many more salvos, and insurers will inevitably get hit. Given the sheer enormity of investment losses, and the ardent attention of regulators to Wall Street's myriad of professionals, it would indeed be foolish to underestimate the potential exposures.
We are also seeing a slew of companies, including some of the glamourous name brands, suffering the indignity of rating downgrades as investment portfolios have been eroded, and past losses, including the never-ending nightmare of asbestos, take their toll. Further, keep a watchful eye on the bond market. As insurance companies bailed out of equities, many piled into the perceived safety of bonds. But given any sustained economic recovery and bonds will surely fall. This could put many insurers under even more pressure as solvency margins are stretched still further. However, and in stark contrast, other big companies, especially those emanating from Bermuda with seemingly endless mountains of virgin cash, now roll into pastures very new such as primary professional liability business.
But while much of the market is happily sunning itself in the mid-cycle glory of the long-awaited 'hard' market, there is alarmingly, in some sub-sectors, the return of the 'c' word - competition. Given the prospect of excellent returns, not just new capital but reallocated existing capacity is finding its way toward the professional liability market place. There is no question that the market is still undercapitalised, but the new entrants need to be disciplined and careful not to actually change things for the worse. One particularly worrisome aspect of the current situation is that the market remains in an acutely delicate state. Given that there are still no investment returns of any significance, insurers are having to generate genuine 'pure' underwriting profits, but this is difficult on any business, and particularly so on more esoteric lines such as professional liability.
The particular 'peculiar' with the current market situation is that the on-going 'mature' markets, while currently having a glorious time with increased rates and limitations to coverages that combine to make for a great underwriting opportunity, are continuously having to look over their shoulder at often seriously deteriorating back years, especially regarding D&O, lawyers' E&O and medical malpractice areas. Indeed, for many underwriters the increasingly poor development on prior years is acting to spoil the party of the current robust conditions. If underwriters were to take a long hard look at their figures on a triangulated development basis they would not necessarily feel very happy. For when looking at the real profits on their 2002 business, and fairly confident profit projections for 2003 and even 2004, they very well might catch a cold upon reviewing say their maturing back years on 1999, 2000 and 2001. These were indeed torrid years for writers of professional liability and the continuing negative development on such years will continue for some time to come. This will act to seriously depress the euphoria of the current hard market conditions.
We are clearly in a paradox situation. We currently are experiencing quite excellent trading conditions for underwriters. Now is the right time to be in this business; given an historical context, underwriting opportunities have rarely, if ever, been better than now. However not all is rosy. Very substantial tail problems stalk the background, and yesteryear's figures could rudely interrupt the current and future years. The proverbial avalanche of past losses might overtake the snowball of current profits. But the conundrum is that these same profits will likely seduce many new entrants to the market place that might unwittingly act to unhinge the current positive march of the market.
By all means new capacity and players to the market should be welcome, as it is certainly needed. But it is to be hoped that such new entrants will not be naïve and will move forward with what is a very necessary recovery of the professional liability market, and not create any return to a foolish underwriting environment. It is obvious that the next few months and years will be hugely important for the market, so let's hope that the market collectively does the right thing. No easy task.
By David Doe
David Doe is a Director of Lloyd's broker Alwen Hough Johnson Ltd, and Chairman of its special lines division. He also underwrites miscellaneous and insurance brokers' professional liability business on behalf of various Lloyd's underwriters.