Why D&O price cuts may not be justified

Softer market conditions reported in some professional liability lines are premature and unjustified, a global reinsurer told September’s National Insurance Conference of Canada (NICC) in Montreal.

The NICC reinsurance panel followed a presentation on the global economy by Swiss Re’s chief economist Jerome Jean Haegeli, in which he used letters of the alphabet to stand for certain concepts he was discussing.

Ken Brandt, chairman, president and CEO of TransRe, mimicked Haegeli’s approach when he expressed his surprise at the scaling back of rate increases in professional liability lines.

“If you look at the professional liability side — and I’ll be more specific, the D&O side, and maybe even more specifically, the commercial D&O side — it reminds me of Jerome’s presentation earlier with the letter ‘I,’” said Brandt. “I can think of a couple adjectives [to describe lower rate increases in the D&O market], like ‘insane,’ ‘idiotic.’

“It’s a drunken booze fest for rate guys writing D&O, and we can’t figure out why. We can’t figure out the justification for this.

“When we talk to underwriters, they say, ‘Well, rates were so elevated, we’re coming off very high levels,’ but that does not justify cutting rate at 20%, 30%, 40% or 50% on some risks in some layers….

“It’s very troublesome….It’s a very big market, so we’re concerned about that.”

In its 2021 Insurance Market Report for Canada, Aon Canada noted professional liability lines saw double-digit rate increases during the first half of 2021. On average, rate increases for ‘clean risks’ ranged from 10% to 15%, with insurers seeking substantially higher rate increases in perceived higher-risk classes such as architects, structural engineers, and geotechnical engineers.

But rate increases started to dip in 2022, in some cases by as low as single-digit increases, per Aon’s 2022 Insurance Market Report for Canada.

“Capacity for professional liability insurance has stabilized as many insurers are now looking ahead for growth after previously reducing/managing their capacity in this space,” Aon’s report said. “Rate increases vary based on the risk, but the market is generally seeing low double-digit increases for risks with low severity and low frequency in claims experience.

“The increase in competition can facilitate single-digit rate increases for claims-free accounts.”

Brandt observed soft market conditions in professional liability lines between 2013 and 2018 brought about harder market conditions in 2019, with higher rates and lower policy limits.

“For ’13 to ’18, it would be very common to issue a $25-million limit or a $50-million limit,” Brandt said. “After 2018-19, those [policy limits] all dropped to $5 million and $10 million. You don’t have to be a rocket scientist to figure out a lot more rate and a lot less limit is going to generate a pretty good result.

“We think there’s going to be two or three years of very good underwriting margins [in professional liability] coming out of those hard market days. And I guess falling into the category of, ‘All good things must come to an end,’ both of these sectors [traditional casualty market and professional liability lines], are facing a lot of headwinds.”

This story is excerpted from one that appeared in the December 2023 -January 2024 print edition of Canadian Underwriter. Feature image by iStock.com/alexsl