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Walking the US professional liability tightrope

The article below, by Max Carter, CEO at New Dawn Risk, was originally published in Insurance Day magazine on November 8th, 2019

The overall size of the global professional liability (PL) insurance market is expected to top US$45 billion by the end of 2023. The United States will continue to represent the lion’s share of this figure but there is a very real risk that the London market will be underwriting a decreasing proportion of US PL business.

Historically, hundreds of millions of dollars of US PL premium has been written in the London market every year. But these are challenging times. Over the last three to five years it has become increasingly difficult to persuade new US PL business to come to London. The longest soft market in living memory and what that has meant in terms of pricing and the availability led to a point where something had to give.

The Lloyd’s Decile 10 review last year, even though it did not include US PL business in its scope, was very much a tipping point. US Directors & Officers insurance was part of the Decile 10 and this had a knock-on effect with many London-based underwriters taking a more aggressive view; they have since been taking a long, hard look at their portfolios and made the decision to pull back from US PL business.

Those that remain have been taking a more disciplined view – raising prices, cutting back on capacity and offering more restrictive terms. Meanwhile, London’s main competitor for US PL business – the US domestic market – has continued to see soft conditions. This is not to say that the US domestic market is not seeing similar pressures to those that London has to contend with, it is simply that as it is a larger market, home to many more insurers, it can sustain lower prices for longer. The US market will start to harden, just some way behind London.

In the meantime, as London draws back, US PL business is moving back to the US at a faster rate than for some time. In theory, this should be a temporary shift, part of the natural cycle of the market. There is a parallel here with the US D&O market, where rates went up about six months before US PL, around 12 to 14 months ago. We are now seeing US D&O business starting to flow back to London, particularly for public D&O where capacity is a factor, so it is not unreasonable to expect that US PL business will follow suit and come back to London as rates in the US domestic market firm up over the next 12 months.

Taking a strategic approach

However, there is no cast-iron guarantee that it will. Much will depend on how the London market approaches the current imbalance between the US and UK when it comes to US PL business. If we look back to the last hard market in the early part of the last decade, London effectively shut out US D&O business and it took a very long time for trust to be regained. We would not want a repeat of that situation with US PL.

It is irrefutable that a correction was needed in the US PL market, as in many others. The fact that London moved first to address this would suggest that the damage should be less than elsewhere, and it should be able to regain a strong position.

But there are risks. If this period is managed too aggressively and relationships with US brokers and clients are damaged, London-based underwriters may find it difficult to rebuild their portfolios when prices return to a sustainable level.

It is vital not that they do not alienate the US market by coming across as unreasonable or unwilling to engage with US clients and brokers. Of course, price corrections are necessary, but not best achieved through a knee-jerk reaction. A 50% rate hike in one go is hard to swallow, much better to spread it over three years so the blow is softened. Likewise, playing hardball by turning your back and walking out of the door if your terms are not met might seem an attractive short-term strategy but it does rather leave one open to having to do some significant bridge re-building at some point in the future.

Taking a balanced, long-term view is necessary to protect future market share. And that means keeping the channels of communication open now, prioritising face-to-face renewal discussions with clients to hear their side of the story.

The role of the London wholesale broker in this process needs to be respected too. Underwriters need to work closely with them to help negotiate a healthy position of compromise. They are widely represented in the US PL market, not just by independent specialists like New Dawn Risk, but also by the likes of mid-size brokers including Gallagher, RKH and Lockton, as well as the largest global players at the top end. Together this represents an important distribution channel that also supports client engagement, especially if bad news needs to be delivered – something always better communicated in person with a view to keeping the door open for the future. 

The London market can win back its share of the US PL market, but only by taking a sensible and sustainable approach.

Max Carter, CEO, New Dawn Risk

The original article can be viewed here