PLUS Report

Turning the Market

The number of professional liability class actions is on a record tear, which should impact rates eventually.
By: | October 12, 2017 • 5 min read

The professional liability (PL) market became increasingly more competitive recently with record levels of capacity and capital and insurers fighting on price and policy terms to gain share.
Among the most competitive areas on coverage and pricing is middle market technology Errors & Omissions (E&O), closely followed by Directors & Officers (D&O) and employment practices liability (EPL).

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With large data and privacy losses from retail and big technology services claims mounting up on top of already expanding global privacy laws and a lack of primary PL coverage for tech firms, opportunities abound, particularly in cyber.

Cyber also drives demand for higher limits in the wake of the recent spate of high-profile cyber hacks and narrow indemnification language in vendor agreements.

With an estimated 500 PL securities class actions expected in 2017, according to industry experts, it’s probably only a matter of time before the market turns.

All of these factors will be key talking points among brokers, insurers and risk managers at next month’s Professional Liability Underwriting Society (PLUS) 30th International Conference in Atlanta.

“Rates are still coming down,” said Brian Wanat, CEO of Aon Risk Solutions’ Financial Services Group. “But with many insurance carriers barely breaking even and a low interest rate environment, some may be forced to try to gain rate or move away from writing those classes of business.”

Brian Wanat, CEO, Aon Risk Solutions’ Financial Services Group

A.M. Best’s latest special report on PL said that key coverages continue to be impacted by “more than ample capacity and competitive pressure on rates, and terms and conditions.”

“Beginning in Q1 2014, the influx of additional competitors in the professional liability market space has slowly but steadily driven rates downward,” the report read.
“In addition, the E&O marketplace is still trying to get its arms around the impact of large data and privacy-related losses affecting the retail and health sectors, along with other technology losses that have breached the six-figure threshold.”

The ratings agency expects PL markets to remain robust in 2017, with heightened competition in D&O and E&O specifically.

The Growth of Cyber

Cyber insurance is big business, not just in America but globally, with total premiums reaching $2.5 billion last year and expected to climb to $10 billion by 2020, according to Willis Towers Watson.

The middle market has become extremely competitive with explicit grants of coverage for ransomware and social engineering in stand-alone cyber forms as more first-time buyers enter the market.

Bob Parisi, managing director at Marsh FINPRO, said that the biggest challenge facing the PL market was the changing way companies do business and interact with their customers, vendors and trading partners, as well as how that risk is underwritten.

“After the latest WannaCry and Petya attacks, companies are a lot more wary and have been focused on their cyber security and controls,” he said. “Technology has skewed everything and added a layer of risk that wasn’t there 20 years ago.”

Parisi, moderating the “Business Interrupted: An Alien Concept?” panel at PLUS, added that insurers expanded their coverage in response to the proliferation of cyber attacks.

Matthew Prevost, vice president of Chubb Financial Lines, said cyber impacted all PL lines, highlighted by the recent wave of Petya and NotPetya attacks.

“After the latest WannaCry and Petya attacks, companies are a lot more wary and have been focused on their cyber security and controls. Technology has skewed everything and added a layer of risk that wasn’t there 20 years ago.” – Bob Parisi, managing director, Marsh FINPRO

“There’s not one line that ‘cyber’ doesn’t touch now, and companies and underwriters need to understand explicitly how it interacts with their business,” he said.

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Prevost, moderator for the “Ransomware Attacks! A Survival Guide” panel at PLUS, said that organizations can mitigate against cyber attacks by backing up their data both on and off line and by regularly patching to keep it updated.

“More broadly speaking, a company needs to be aware of both the internet response to an attack and their own risk management strategies,” he said.

“They need to recognize what to do in the event of an attack, whether it’s an individual device or a network-based ransomware attack.”

Boardroom Risks

D&O direct written premiums remained flat at $6.4 billion for the third straight year in 2016, with AIG maintaining the biggest share of 15 percent, according to Standard & Poor.

While loss ratios improved slightly, the WTW report expects securities class action filings to increase with around 500 expected this year; almost double the 270 recorded in 2016 and well above the 20-year average of 188.

Pharmaceutical industries were the hardest hit sub-sector, accounting for one quarter of the 125 reported filings so far this year, said WTW.

Geoff Allen, executive vice president, national professional services practice leader at WTW’s FINEX North America, who works predominantly with law firms, said that the biggest challenge facing companies in terms of PL was the rising cost of defending lawsuits.

“Coverage offerings are being stretched at an unprecedented pace while more capacity floods the space.” – Al Fantuzzi, SVP, professional liability, Allied World

“As a result we are seeing a number of cases signed off with significantly quicker settlements because of the cost of litigation,” he said.

“Also, from an insurance perspective, ongoing systemic claims are driving big pricing movements, and it’s hard to see where it’s going to end.”

In E&O, Al Fantuzzi, senior vice president, professional liability E&O at Allied World, said that the immediate challenge was maintaining a core portfolio in a constantly expanding marketplace.

“Coverage offerings are being stretched at an unprecedented pace while more capacity floods the space. The carriers that commit to it with underwriting integrity will be the most positive contributors, which in turn perpetuate opportunities to operate in these segments,” he said.

Workplace Liabilities

EPL rates also remained mostly stable with average primary rate increases of five percent, except in California where increases continue to fluctuate between five and 15 percent, said the WTW report.

The EPL market also remains very competitive with capacity of more than $800 million in the U.S., Bermuda and Europe combined.

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Claudia Costa, a partner at Gordon Rees Scully Mansukhani, said that among the biggest challenges for employers were preventing cyber bullying and policing their employees’ use of the internet and social media.

“There is a definite relationship between what businesses are doing to prevent cyber bullying … and cyber security,” she said. “If employees are surfing the internet, an organization is effectively opening up their server to attack, and I think that’s only going to increase.”

Costa, who will be moderating the “Warning — The Internet May Be Hazardous to Employees!” panel at PLUS, said that employers needed to tighten up their policies on internet and social media usage, and to be more proactive in investigating allegations of online bullying or threats of violence made by an employee.

“Companies need to start treating claims of cyber threats and bullying by employees in the same way they would as with a complaint of discrimination,” she said.

PLUS International Conference 2017

Two-time Super Bowl champion Peyton Manning will take a star turn at this year’s PLUS conference, which will be held at the Marriott Marquis in Atlanta Nov. 1 through Nov. 3.

The former Denver Broncos and Indianapolis Colts quarterback will deliver the opening keynote, sharing strategies for adapting to change. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

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.

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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.

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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?

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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.

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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.

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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]