Famed vaudevillian, nightclub performer, movie actor and then later television variety host, Jimmy Durante, also known as "the Schnozolla because of his extremely large nose," used to perform a little ditty that delighted his audiences. It went this way. "Did you ever get the feeling that you wanted to go? Still you had the feeling that you wanted to stay? Wanted to go. Wanted to stay." And then he would smile and hit one of his reedy, high-pitched notes and hold if for about a minute. He did many variations on this little song, but the sentiment was clear each time. Sometimes, when all the evidence tells us to get out of a situation, something else tells us that we have to stay.
Syndicates at Lloyd's of London must feel that way sometimes about the insurance market in the United States. The litigious nature of the U.S. society is unlike anywhere else in the world. In the United States, the word "lawsuit" is almost synonymous with the word "windfall." If you slip and fall on someone's property, even through your own carelessness, someone is going to pay, usually an insurance company. If a woman unadvisedly puts a hot cup of coffee in her lap when she's driving and the coffee spills, again the insurer of the seller of that coffee is on the hook.
In fact, so severe is the tort liability situation in the United States that the asbestos litigation explosion that began just two decades ago almost toppled Lloyd's of London and eventually succeeded in bringing about major transformations in the marketplace just five years ago. In the United States, multimillion-dollar lawsuits, jury awards and settlements are so commonplace that one would think overseas insurance underwriters would avoid this side of the Atlantic like the plague.
Not so. In fact, overseas insurance interests continue in their determination to capture larger shares of the U.S. liability insurance market. DP Mann, Ltd., which is listed as Syndicate 435 at Lloyd's of London, is one example. Moreover, among the areas that DP Mann continues to pursue is the very volatile area of professional liability and, more specifically, directors and officers liability.
At DP Mann's offices in the financial area of London, Rough Notes interviewed two executives of the organization--Chris Thorne and Chris Warrior, both specialty lines underwriters, the former in charge of professional liability in general and the latter specializing in directors and officers. Both agree that the U.S. liability market has been and may continue to remain troublesome in terms of excessive litigation. But they say also that the U.S. market represents significant potential profits, if, as they say, "you know what you're doing."
"In the professional liability area, we write medical malpractice, general liability, workers compensation, legal expenses, miscellaneous liability--in short, all U.S. liability classes," says Thorne. And Warrior adds that about 30% of the firm's professional liability business is in D&O. "Ninety percent of that is U.S. business," he says. "There is no question that the U.S. market's D&O exposures are important to us. The U.S. D&O market represents some $3 billion in premiums. The entire rest of the world represents only about $300 million in premiums in total." A strong incentive to "stay," as Durante would have said, in the U.S. liability arena.
Thorne and Warrior allow that all professional liability lines, including D&O, have been loss leaders for the entire insurance industry in the last decade. "A good many 'new players' came into the marketplace in the 1990s," says Warrior, "causing prices to drop to ridiculously low levels. The 'naîve capacity' took an optimistic view of the D&O marketplace, writing business with total abandon. We took a different view. While others were slashing prices, we began increasing our prices in recognition of the volatility of the marketplace, even if it meant losing business. As it turns out, we were correct, because many new players have fallen by the wayside and now it is generally accepted that prices will have to increase dramatically. With proper pricing, the profit potential is there."
Thorne says that a similar scenario is being played in the professional liability area overall, although price increases have not increased as dramatically as in D&O. "There is an overall firming up of the professional liability marketplace, but it is happening slowly."
There are various reasons why D&O is experiencing such dramatic changes. With new laws and court decisions more broadly defining the responsibilities of corporate executives, the number of personal liability suits--and the value of the settlements of these suits--continues to escalate. Even when executives win, their legal costs can be astronomical. Moreover, corporate directors and officers are being watched more closely than ever before by stockholders and other interested parties.
In addition to a company's stockholders, a firm's competition can bring suit against directors and officers alleging unfair competition in the marketplace. Government authorities, such as the Securities and Exchange Commission and the Federal Trade Commission, can also bring D&O actions. Directors and officers lawsuits can be brought for such "wrongful acts" as: failure to stop action resulting in damage to the company; unwarranted dividend payments, salaries or compensation; misuse of company funds; inefficient administration resulting in losses; misstatement of financial reports; violation of covenants in loan agreement or indenture; and failure to disclose promptly information relative to significant developments with respect to the company. The list goes on and on.
"In addition to the usual exposures," says Warrior, "there have been other changes in the D&O marketplace which are having a drastic effect on pricing. "There are the recent changes in the securities litigation laws in the U.S. In addition the financial services deregulation law, which has broken down barriers between securities firms, banks and insurance interests, is having an effect. There has been substantial merger and acquisition activity in the U.S. Many of those mergers came about because there was a perceived need for increase in size, rather than because of opportunities for a proper fit. However, many of those mergers have not worked well and companies have been forced to write off millions of dollars. The rush to "buy or be bought" is bringing about many D&O lawsuits," he says.
Warrior should know what he's talking about. DP Mann is the third largest player at Lloyd's in the area of facultative D&O. "We write everything from the smallest nonprofit accounts to the largest commercial accounts. Our distribution is through the Lloyd's broker, and through the broker we do business in the U.S. with the largest producers and the smallest one-person shop. However, we insist that it be good business and that it be priced properly."
Asked about the changes that have taken place at Lloyd's in recent years, specifically the dominance of corporate capital in the marketplace, both Thorne and Warrior say that the changes have definitely been for the better. "We are representative of corporate capital at Lloyd's," says Warrior. "We are part of the General & Cologne Re, which, in turn, is owned by Berkshire Hathaway. Overall, corporate capital has had a very positive effect on Lloyd's. Oversight of the marketplace is now much more intense than it was under the old individual investor days, and that's a good thing."
Therefore, professional liability and D&O exposures in the United States need not worry about finding capacity in the Lloyd's of London market, as long as Syndicate 435 stays around. Pricing is bound to increase, according to the DP Mann underwriters, to make up for the extended soft market of past years. "But we represent a stable market, and that's what buyers want in the end. We are sophisticated players. We reserve on individual risks, rather than block reserving, as do many of our competitors. That means we're here for the long term."
In other words, DP Mann is going to "stay" in the United States. *
For more information:
DP Mann
Phone: 020-7680-4296
e-mail: c.thorne@dpmann.co.uk