Professional Liability Underwriters Grapple with the Impact of Social Inflation

Professional liability underwriters head to this year’s PLUS Conference with rates on the rise but damages payouts rising even faster.
By: | October 30, 2019

The 2019 Professional Liability Underwriting Society (PLUS) Conference takes place in Maryland from November 11 through 13, with the PL landscape undergoing an “unprecedented” period of evolution. That’s according to PLUS president-elect Todd Greeley, SVP, executive & professional lines claims for Berkshire Hathaway Specialty Insurance, who told Risk & Insurance®: “The real theme of the conference this year is change.”

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The event, which last year attracted more than 1,300 attendees, will tackle a host of issues facing PL underwriters, from escalating damages verdicts to emerging liability risks. But the hottest topic on delegates’ lips — and the subject reserved for the final conference session on the agenda — is pricing.

After years of rate decreases, heavy losses have put PL underwriting sustainability in the spotlight and finally triggered a significant hardening of rates in pockets of the market.

Not all PL lines have seen rate hardening — Deborah Bjes, head of small and mid-sized lawyers for Swiss Re, for example, noted that rates for lawyers remain relatively flat. However, carriers are broadly seeking to raise PL rates across a number of lines on the back of rate action in the D&O space in particular, where premiums have risen by 20% or more this year.

Hardening has been particularly acute for companies involved in initial public offerings and M&A deals, as well as highly-exposed sectors such as pharma, tech, life sciences and health care.

With capacity tightening in these lines even on renewal business, risk managers may face reduced limits or higher premiums before their next budget reviews — and several underwriters told R&I in July that this year’s rate hikes could just be the start.

“Balancing pricing sustainability with what insureds and brokers want is where the challenge really comes into play for insurers,” said Amanda Hickey, VP, E&O for Allied World.

“Part of the task for D&O and other PL underwriters is explaining to certain customers why their risk has changed even though they haven’t had a claim or a loss,” Greeley said.

“However, there seems to be a growing recognition on the buy-side that these issues exist and that underwriters are not crying wolf.”

Millennial Attitudes Driving Up PL Claim Costs

The key drivers behind the rate rises have been a spike in class action suits and a raft of high profile ‘‘nuclear verdicts,’’ which have encouraged even more plaintiff law firms into the space.

Amanda Hickey, VP, E&O for Allied World

According to insurers, millennial jurors are playing a key role in driving up insured losses in the PL space as well. With damages verdicts becoming more severe, insurers increasingly seek to settle out of court. However, those that do go to trial face a new breed of juror keen to stand up to perceived corporate injustices.

“Serving on a jury can give jurors a powerful megaphone through which to express their anger or fear. The plaintiff’s bar is really tapping into that anger, fear and mistrust of professionals, which leads to these very large verdicts,” said Bjes.

Meanwhile, social media and the use of the internet means companies have nowhere to hide if they are found to have stepped out of line.

“Millennial jurors have a strong sense of what is right and wrong, fair and unfair — and there is a lot less gray area than in the past,” said Hickey, who advised organizations that communicating clearly with customers and managing their expectations from the outset can help them avoid costly PL claims down the line.

“Today you have to do more than just be honest and ethical. This must also be documented and clearly communicated,” she said.

“No one wants to read the fine print. People want to know everything upfront. And if a customer receives clear and honest communication, they are less inclined to distrust or file a report.”

According to consultant Nero, security class actions are at their highest levels in the U.S. since the dot-com crash, with 441 new cases in 2018.

Loss severity also continues to rise, with settlements in the U.S. hitting more than $5 billion in 2018, according to Cornerstone. This included five settlements over $100 million and 32 between $10-50 million — a 60% increase year-on-year — while the median settlement more than doubled to $11.3 million.

“Shareholder litigation has always been the big story in D&O, but in recent years it has taken on a new and, frankly, more concerning dimension, with troubling frequency and severity trends in both traditional securities class actions and, perhaps most disturbing, in shareholder derivative litigation,” Greeley said.

Wells Fargo, for example, recently announced a nine-figure settlement in a shareholder derivative case, and with a pipeline of derivatives lawsuits under way, Greeley’s expectation is that many of those cases will settle for “significantly higher” figures than historically seen in shareholder derivative claims..

In most U.S. jurisdictions, individual directors and officers being sued in derivative cases cannot be indemnified by the company, so their only protection is A-Side insurance.

“Historically, the A-Side product has been profitable for D&O underwriters, because claim frequency was relatively low and large losses were fairly rare, but that’s changing,” said Greeley.

Against this backdrop, the PLUS event will feature a D&O session entitled, ‘‘Side A: Still Free Money?’’ as well as a session on transactional risk, which also addresses the evolution of reps and warranties (R&W) coverages — a product being increasingly purchased on the buy-side of mergers.

Despite rising claims activity, Greeley noted that increased competition has led to some softening in R&W pricing as well as meaningful expansions of coverage.

“Not unexpectedly, claim volume also has increased during this time, as has the number of claim disputes, which I suspect is driven in part by the broader scope of coverage.”

Beyond D&O

Special event payouts are also rising in severity and impacting a range of PL lines, particularly employment practices liability in light of movements such as #MeToo.

Deborah Bjes, head of small and mid-sized lawyers, Swiss Re

Privacy breaches also continue to be a hot topic, and cyber risk is a recurring theme on the PLUS Conference agenda — notably including a session on the California Consumer Privacy Act (CCPA), which adds new layers of complexity around data management and compliance for both insureds and insurers.

“Given the influence that California has on both the U.S. and global economies, there’s a real concern that the CCPA is going to have an outsize impact,” said Greeley, who added that with similar bills being introduced in other states, and New York’s arguably going even further than California, “a patchwork system is potentially going to get even more complicated.”

The conference will also feature a session specifically, intellectual property — an emerging risk area which Greeley compared to cyber risk a decade ago — as well as another hot topic for PL practitioners: the legalization of cannabis.

“This is something brokers have a lot of questions about,” Greeley said, highlighting potentially “thorny” state versus federal conflicts for companies operating and trading across jurisdictions.

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“Our main objective [at the PLUS Conference] is to be on the ground with all of our broker partners, to listen to them to learn how we can help them and collaborate with them,” said Bjes.

Indeed, with a plethora of challenges to iron out, insurers and brokers will have to work closely in the months ahead.

“While these are challenging times, hopefully this raises awareness of the benefits of PL products and drives business to the more responsible underwriters, leading to a healthier market environment” said Greeley.

“I think this will be a great conference with an agenda focused on all of these interesting and timely issues.”

The 2019 PLUS Conference will be held at the Gaylord National Resort & Conference Center, National Harbor, MD. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

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