Posted in News on 03 Sep 2019

A myriad of factors can influence the underwriting market at any one time, especially so on long and medium tail lines of insurance business such as Professional Liability. The premium dollar funds arrive long before any claims development and this allows for investment income to be generated. However, insurers’ investment is limited in how much they can invest in higher risk and higher return investments, such as active funds and/or individual stocks.

In that case, insurers’ investment exposures are more likely to be held within bonds and gilts. Only a small amount is then exposed to the fluctuation of world stock markets. The key observation in this respect is that since the financial crash of 2008/9, the world’s major central banks embarked on a deliberate policy of holding interest rates down in order to support economic growth via ‘cheap’ money. For the more cautious investors, this extended period of suppressed interest rates arguably played havoc with any prospect of stellar returns. This has had, and is still having, a particular impact on the US Professional Liability market.

During more ebullient periods of investment, with strong interest rates and enticing Bond yields, insurance can potentially enjoy a high degree of success and enhance corporate earnings. As long as the underwriting results do not experience any catastrophic challenges, a steadily underwritten portfolio of business, with even just one just breaking even (or maybe hovering at a loss), can return double-digit growth courtesy of investment income on the premium before an individual underwriting year of account becomes fully mature and all claims are closed.

On primary US Professional Liability, this will usually be within five years. It is a tried and tested formula and so it should work continue to work in theory. However, this may not be the case if investment returns are minimal or even flat, and coupled with a less focussed underwriting discipline, a business can then be left with a significant challenge to overcome, and in some cases one that represents an incredible risk.

The essential ‘problem’ of underwriting business with a five year tail, for example, is that it can act as a counterbalance to disciplined underwriting principles. Underwriters (and potentially their management) , during this period of time, may underwrite and accept premium before the claims show any meaningful development that can have a corrosive impact on final results. If the underwriter seeks to write a large volume of business, in order to do this they will usually ‘buy into a market’ and they will go cheap in order to underwrite a higher ‘market share.’ With more business written and with the underwriting results appearing to look so good in these formative years, often more capacity will be found to increase the volume, to be even more aggressive than before to underwrite even more business.

This is arguably not a recommended form of underwriting but nonetheless it continues to recur.

The challenge with this type of underwriting approach is that it is prone to failure, and with the current toxic combination of a mix of poor underwriting coupled with unrewarding investment returns, this has and will continually lead to a growing claims tail. The MGA can and will take remedial action but will these steps change the actual underwriting direction? There might be one or two modifications, a slight re-engineering of underwriting on the fringes but essentially the answer is that there will be no change as growth ‘must’ continue.

Undisciplined underwriting and anaemic investment returns in a highly competitive underwriting market is unfortunately slowly changing the landscape of the US Primary Professional Liability marketplace. There will not be a sudden correction as the violent market change of 1986. It might at first be change at a glacial pace, but markets are beginning to hurt and MGAs are retreating as back years of underwriting turn red with losses, these are all sure signs of change.

For more information on the US Professional Liability insurance market and how Alesco can assist your operations, please download the fact sheets above.


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