Profitable D&O market draws new entrants

The directors and officers liability insurance market is attracting new entrants despite falling insurance rates, rising claims severity and abundant market capacity.

While entering a softening D&O market might seem an odd business strategy, the sector currently is profitable, and other factors make it a good business opportunity for new underwriters, market experts agree.

Last week, Cayman Islands-based Ironshore Inc.—formed in December 2006 with more than $1 billion of equity capital—announced that its subsidiary, Ironshore Insurance Ltd. of Bermuda, is opening a New York-based professional liability unit called IronPro.

On May 21, Greenwich, Conn.-based W.R. Berkley Corp. said it was forming a Chicago-based unit, Select Specialty Manager L.L.C., to offer professional liability and other casualty coverages.

Meanwhile, Bermuda-based reinsurer Ariel Reinsurance Co. Ltd. is developing a U.S.-based liability insurance unit that will offer D&O coverage. Last fall, Gary Dubois left his position as chief underwriting officer of New York-based Liberty International Underwriters, a unit of Liberty Mutual Group Inc., to head Ariel's effort.

Ironshore's move into the D&O market was particularly unexpected because of the insurer's stated plan to focus solely on property risks (BI, Jan. 8).

But Chief Executive Officer Robert V. Deutsch said that the availability of D&O market executive Greg Flood to head IronPro forced the change in Ironshore's business plan. Mr. Flood had been executive vp and chief operating officer of National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of New York-based American International Group Inc.

Mr. Flood said that he was drawn to IronPro largely because he is "a huge fan of Bob Clements," who chairs Ironshore's board.

Still, Ironshore and other new underwriters are heading into a marketplace where buyers command 10% to 15% rate cuts.

On top of that, the cost to settle federal class action securities claims last year increased 17.8% to $86.7 million (BI, Jan. 8).

But even with falling rates and rising loss severity, "the business is profitable," Mr. Flood noted.

In addition, like the last two years, 2007 is shaping up as another year of below-normal class action claim frequency, according to market experts.

So while claim severity is greater, each insurer faces a much smaller risk of a loss, said Steve Shappell, managing director of the legal and claims practice for Aon Corp. unit Aon Financial Services Group in Denver. "That's a pretty good bet" for a new underwriter.

Also, the $7 million median value of settlements has not changed materially for years, Mr. Shappell said.

All of that means that as underwriters anticipate what lies ahead for them, "the huge losses are in the rearview mirror," said Lou Ann Layton, a managing director and the national D&O practice leader for Marsh Inc. of New York.

Still, new underwriters are entering a worldwide market that could provide $1.8 billion of capacity to a single risk, while the largest placements rarely exceed $600 million, according to market executives.

But considering that AIG and Warren, N.J.-based Chubb Corp. are such "dominant" market forces, "I think there's plenty of room for other players," Mr. Flood said.

Brokers, noting that buyers continually purchase greater limits, agreed.

"There's plenty of capacity, but there's plenty of room for a couple more players," Mr. Shappell said.

"There's never overcapacity," Ms. Layton said.

"There's still areas where underwriters may not necessarily give clients the coverage consideration they were looking for" when claims come in, she said, referring to excess insurers. "People who can fill that holeÖare important to the buyers."

Claims, rating and market capacity dynamics should not be the driving forces behind an underwriter's market entrance decision, two insurer executives say.

Carl Pursiano, a New York-based senior vp of management liability at Liberty International, noted that more than a dozen insurers have left the D&O market since 2000, including some that should have benefited from the hard market in 2002.

"It takes more than a fair wind at your back to succeed," he said.

"If I'm a new facility, and even as a more established facility, this is a time to build an infrastructure in anticipation of a hard market," he said.

A new insurer's success will depend on not only the legal environment and policyholder demand for additional capacity but also the insurer's underwriting strategies, its acceptance by brokers and reinsurers and the patience of its private equity backers, Mr. Pursiano said.

Mr. Dubois noted that Ariel's business plan always included casualty lines, including D&O, because its targeted client base wants that.

"For Ariel, the market cycle doesn't impact when but how we enter," he said. The softer D&O market means the insurer "has to be more cautious and patient" in capturing market share than it would be during a harder market, he said.