Observations From the Storm

Unless you’ve been hiding under a rock somewhere for the past year or two, yes, we’re in the midst of a hardening market cycle. After a prolonged soft market period, prices seem to be firming in every segment, with drastic changes in classes experiencing the most exposure and poorest results. In the executive liability arena, the best example of this is Directors & Officers (D&O) liability for publicly traded companies. Many insurers are grappling with improving their results. There are several phrases being thrown about during these discussions that are worthy of comment.

Return to underwriting
I’ve heard this phrase used a great deal over the past twelve months. The context is always the same—a suggestion that the market as a whole had stopped scrutinizing the business that it took in, and now realizes that it must return to underwriting in order to improve results. One must confess how humorous this concept is: if “underwriter” is the name of the profession, how could one stray so far from the concept of underwriting as to necessitate “returning” to it?

There does finally seem to be a growing realization in the market that underwriting is not simply individual risk selection. There once was a perception that underwriting was an “art.” It is instead a science that can be performed artfully. Achieving an underwriting profit requires things such as an understanding of the cost of capital deployed to support the business, accurate pricing and reserve assumptions, underwriting/risk selection discipline, reliable management information to evaluate results and the unwavering resolve to make changes that are needed to sustain profitability. Without all of these, an insurer is ill equipped to sustain itself through all of the phases in a market cycle. This isn’t just an important goal for returning value to the shareholders of the insurer, but also for providing reliable capacity to policyholders, as well as agents and brokers.

The perfect storm
What a great book, and the movie was really pretty good too if you saw it on the big screen. Over the past year I’ve heard this phrase uttered countless times to describe how the market got into its current predicament with D&O. The expansion of coverage to include entity securities coverage, broadened terms and inadequate pricing, combined with a significant increase in claim severity and frequency of severity, has been likened to the meteorological events so dramatically bearing this name. Sounds dramatic—as if preordained and even tragically unavoidable. Notably, it also attempts to shift the blame for the poor results to something beyond our mortal control. Just not true.

Editor’s Note: To see the full story, see the March 10 issue of Insurance Journal. Jeffrey Klenk is the senior vice president responsible for Executive Liability for the Bond division of Travelers Property Casualty. He can be contacted at jklenk@travelers.com.