Trends to Watch

7 Factors Potentially Driving Professional Liability Rate Changes in 2019

Historic volatility on both economic and social fronts creates conditions for more litigation against directors and officers and claims on professional liability policies.
By: | January 31, 2019 • 6 min read

Professional liability risk is dependent on a number of external forces, including macro factors such as the state of the economy and nationwide litigation trends, and micro factors such as isolated events that generate negative publicity.


Although pricing for D&O policies over the past several years has continued to decrease, a number of trends are converging in 2019 that will challenge the professional liability market and potentially reverse the trend. On both macro and micro fronts, volatility is making this risk more difficult to insure.

“Given the change and ongoing uncertainty in this industry, it’s hard to see that there won’t be some impact on pricing in the year ahead,” said Bill Cotter, EVP, Chief Underwriting Officer – Professional Liability, North America at Allied World.

Here are seven factors that could lead to professional liability rate increases in 2019:

1. Economic volatility creates conditions for shareholder lawsuits.

“The professional liability market benefits from a stable economic environment, but we have been experiencing historic volatility in the stock market.

Bill Cotter, EVP, Chief Underwriting Officer – Professional Liability, North America, Allied World

At the same time, corporate balance sheets are impacted by the fact that corporate debt has skyrocketed given the low interest rate environment of the past 10 years” Cotter said.

These factors combined mean that companies may have to re-evaluate how they finance themselves. If they had been financing through debt, then rising interest rates may inhibit their access to credit markets, which creates liquidity issues, which in turn can have an effect on stock value.

“That gives rise to shareholder litigation that directly impacts directors’ and officers’ policies,” Cotter said.

2. Policy pricing has grown “pear-shaped.”

According to an analysis by TransRe, pricing for directors’ and officers’ policies has dropped 15 percent over the past five years, even though losses have increased. Increased litigation has driven up both claim frequency and severity, but an abundance of capacity had the opposite effect on pricing.

“The economics over the past few years have been pear-shaped,” Cotter said. “Only time will tell if this trend will continue and, if so, for how long.”

3. The impact of negative events is greater than ever.

Event-driven litigation is emerging as a major driver of D&O losses. Thanks to the power of social media, any bad publicity focused on a C-suite executive travels farther and faster than ever before.

“Social media is putting the speed and impact of negative events on steroids.” Cotter said. “Bad press reaches many more eyes and ears and therefore may attract more litigious claimants.”

Want to learn more about D&O trends? Click to read why one broker expects the market to harden in 2019.

Claims can arise from a variety of events — allegations of sexual harassment, which have garnered immense public attention amid the #MeToo movement, man-made disasters and weather events and cyber breaches, among others.

Depending on the type of event, losses can cross multiple lines creating aggregation issues for insurers and reinsurers alike. A lawsuit alleging racial discrimination, for example, would primarily impact employment practices liability coverage, but resulting negative publicity could subsequently cause a D&O loss. High-profile cyber breaches can have similar outcomes if those affected believe management negligence was a factor.

4. New employment practices challenges are addressed through litigation.

Investigations and lawsuits filed by the Equal Employment Opportunity Commission reached record numbers in 2018, as did the proportion of class actions. The increase is driven largely by broader societal trends that are throwing employers for a loop.


An increasing number of people seeking coverage for transgender surgery under their employer-sponsored health plans, for example, is one such trend that most companies have never encountered before. Excluding the coverage could be construed as LGBTQ discrimination.

Marijuana legalization poses another challenge. How should employers respect employees’ newly granted right to use marijuana while also maintaining workplace safety and productivity? Are prohibitions of marijuana at work legal?

“These issues will be resolved through litigation, and there is ample opportunity for the plaintiff bar to bring many more of these cases in the future,” Cotter said.

5. Mega-liability losses are setting new precedents.

Jury awards and settlement amounts seem to reach unanticipated new highs every day. Multimillion and even billion-dollar verdicts are setting new precedents that will only make litigation that much more expensive in 2019.

“Certain pension funds are treating litigation as an investment class in itself,” Cotter said. “Litigation finance companies backed by hedge funds have existed for many years internationally, but here in the U.S. it’s relatively new. What does that mean for the future of litigation? We just don’t know.”

6. The Supreme Court opened up opportunities for forum shopping.

In the case of Cyan Inc. versus Beaver County Employees Retirement Fund, the Supreme Court ruled unanimously in 2018 that class action suits under the Securities Act of 1933 can be brought in state as well as federal courts.

Jury awards and settlement amounts seem to reach unanticipated new highs every day. Multimillion and even billion-dollar verdicts are setting new precedents that will only make litigation that much more expensive in 2019.

According to Harvard Law School, the decision “swings the doors of state courts wide open to actions asserting ’33 Act claims against issuers, officers, directors, underwriters, and others involved in the securities offering process.”

Said Cotter, “It creates the opportunity for forum shopping, as well as multiple cases arising out of the same event occurring at the same time and in multiple jurisdictions. As a result, litigation against directors and officers will likely grow more frequent and more costly in 2019.”

7. An accelerated pace of change dramatically impacts risk exposure.

Risks of all types are emerging and evolving faster than ever thanks to the rapid pace of change driven by technology. For directors and officers, the rise of crypto currency provides an example of just how quickly new risks develop and can have unforeseen impacts on professional liability.

“Say a private company with a D&O policy starts issuing cryptocurrencies mid-term. Because those currencies are unregulated and fluctuate so wildly in value, they are a source of potential litigation and create a very significant change in the insured’s risk profile,” Cotter said.

“But cryptocurrency is a symptom of a much broader challenge, which is the pace of change catalyzed by technological advancement combined with society’s general lack of understanding of how to manage it. A company’s risk profile can shift dramatically over a 12-month policy period.”

Communication is Key to Managing Change

Given how quickly things move today, insureds should make sure to sit down with their carrier far in advance of renewals so both sides can understand changes in risk profile and risk appetite and establish expectations early.


“There is a need for open dialogue,” Cotter said. “Clarity as to the nature of risk being presented is critical; underwriters need to understand risk to be able to underwrite. Likewise, carriers need to communicate how the market is shifting and explain how that impacts scope of coverage and pricing.”

Though relationships always matter, they become even more vital when so much volatility is at play. A history of transparency and trust will work in insureds’ favor.

“The best way for directors and officers to protect themselves,” Cotter said, “is to communicate early, often and openly with their brokers and underwriters.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]