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Critical Issue Report

It's the economy!

Increase in litigation that follows a bad economy
generally leads to a tightening market

By Phil Zinkewicz

The current disastrous economy, a slow-but-sure rise in litigation activity and a perceived determination on the part of property and casualty insurance companies to seek rate increases are all playing roles in the possible turnaround in the P-C marketplace, according to various sources in the industry.

For the second quarter in a row, commercial property and casualty market premiums continued to level off across small, medium and large accounts, says The Council of Insurance Agents and Brokers (CIAB). In its newest market index, CIAB President, Ken A. Crerar, says: “We saw some rates creeping up as the impact of the weak economy and increases in reinsurance rates took hold in the primary market. It was by no means a dramatic turnaround and insurers continued to be very competitive out there, but the line on rates appeared to be holding, particularly on renewals.”

Many brokers questioned by the CIAB said rates were flat, while others said the market is firming in some areas. “Pricing seems to be firming a bit, but underwriters are still willing to negotiate,” one broker said. “Insurers are trying to keep renewals flat but cutting like heck on new business opportunities,” said another.

One respondent said: “They [underwriters] are trying to get rate increases but [are] desperate to keep business, so rates stay flat to slightly lower.”

The CIAB said that, while there was some upward rate creep, first quarter 2009 commercial rates declined on average by 5.1%, compared with a 6.4% decrease in the fourth quarter of 2008. “On average, large accounts were down 6.4% compared with 8% in the fourth quarter,” said the CIAB.

The market index also found that, while 34% of brokers said rates for directors and officers liability did not change, another 28% said premi­ums increased 1%-10% since the last quarter. “No changes—with the exception of D&O, which is being carefully underwritten,” said one broker, who added: “Financial institutions are under particular scrutiny and pricing pressure.”

Fifteen percent of the brokers said E&O rates climbed 1%-10%, compared with 6% in the fourth quarter of 2008. Other lines that edged up include commercial property, flood, employment practices and surety bonds, according to the CIAB report.

The Conning Report

Meanwhile, a recent report by Conning Research and Consulting shows that the general liability line of insurance appears to be tightening. The general liability line of insurance has produced industrywide combined ratios below 100% for the past two years, says Conning, but this profitable underwriting performance is unlikely to continue.

“We project that the next couple of years will see a moderating in general liability premium reduction, gradually leading to a modest increase by 2010,” says Mark Jablonowski, analyst at Conning. “However, losses and expenses are forecast to grow more quickly, with a resulting rise in combined ratios reaching 107% by 2010. In the longer run, the future of the general liability insurance market will play itself out between the cumulative effects of small to moderate losses and the rising prospect of mega-risks.”

The Conning Research study, “General Liability: Staying Relevant (and Profitable) in the New World of Risk,” identifies the issues facing the market and a number of considerations and actions that insurers should address in order to respond.

“History has shown us a cyclical increase in general liability losses in periods following recessions,” says Stephen Christiansen, director of insurance research at Conning. “At the same time, longer-term secular trends point to an increase in both smaller claims and larger mega-risks. Meeting the challenges to profitability requires a variety of considerations on the part of insurers.

“Foremost is the ability to monitor trends in costs—-particularly losses—and demand,” Christiansen continues. “Longer term, the best prospects for general liability insurers may come from expanding the model of specialization in risk that has already proved to be a successful differentiator among companies.”

The role of litigation

Claire Wilkinson, vice president of global issues for the Insurance Information Institute (I.I.I.), says that increased litigation has played a part in the slowly tightening insurance market. “The tort system has been one of the most significant cost drivers of insurance for some time,” she says, “and consumers pay.”

She referred to a Fulbright’s Litigation Trends Survey, released late last year, which said that more than one-third of corporate counsel expect the pace to increase in 2009. While the report says that there was a marked drop in new cases and regulatory proceedings in 2008, 43% of billion-dollar companies are forecasting a possible litigation uptick amid the economic slowdown.

“Following two straight years of reporting declines in the number of new lawsuits and regulatory proceedings—including a drop in large dollar cases—U.S. companies now anticipate an uptick in new actions and government probes, as well as the need to hire more in-house litigation staff to help manage the rise in disputes,” says the study.

“This year’s survey appears to mark an inflection point for American business, between the end of a prolonged period of prosperity and the start of a period of economic challenge that is likely to fuel litigation over who is to blame and who should pay for the consequences,” says Stephen C. Dillard, who chairs Fulbright’s global litigation practice. “Given that we were polling in-house counsel on the cusp of the transition, it’s no wonder that this year’s findings highlight both the evident calm before the storm, as well as the sense that disputes are on the rise,” Dillard said when the study was released.

Dillard said a look at current exposures makes clear the breadth of the U.S. disputes scene, pointing to 15 general areas of litigation cited among counsel’s top concerns. “Litigation affects all industries and regions, and certainly all sizes of companies, though larger firms invariably invite more cases than small and middle-market enterprises. With the economy having fully shifted into bear mode, in-house counsel are expressing concern that all-out actions could spill onto multiple fronts—not only the perennial contract and employment matters, but also cases stemming from professional liability, real estate, insurance coverage, bankruptcy, theft of trade secrets and securities litigation.”

The author
Phil Zinkewicz is an insurance journalist with some 30 years’ experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.


“They [underwriters] are trying to get rate increases but [are] desperate to keep business, so rates stay flat to slightly lower.”

— Respondent from CIAB’s
market index survey



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