Hiscox Exec Sees Government Action as Key Factor Affecting Professional Liability Lines

Global financial turmoil is expected to have an impact on professional liability lines such as directors and officers and employment practices liability, but one underwriter in the field said government action may have an even greater impact in these lines.

Underwriting profitability is a primary concern for insurers writing D&O and employment practices liability coverage, said Bertrand Spunberg, senior vice president and head of management liability products with Hiscox Insurance Co. "After several years of soft market conditions in which price and retention were very low, we seem to be at the point now where market conditions and loss experience are on a collision course."

Much of the concern over loss experience comes from the EPLI segment, but Spunberg added D&O lines, "which used to be much safer, are now being driven by true loss experience."

Spunberg cited "increased regulatory enforcement" as a main driver of increased loss experience in professional liability lines, a phenomenon he sees in both the United States and Europe.

The U.S. market is seeing enforcement costs coming from four main sources: the Equal Employment Opportunity Commission, wage and hour enforcement, antitrust enforcement and Foreign Corrupt Practices Act enforcement.

D&O and EPLI trends in the United Kingdom and Europe are "interesting," said Spunberg, in that there are similarities to U.S. experience but there are also differences.

Spunberg has seen three big trends in the U.K. and European markets in the past few years. "Legislation in Europe has increased the level of governance dramatically," he said.

Secondly, a number of European countries have adopted "some form of class-action redress, somewhat similar to the U.S.," which Spunberg said is a "new trend."

The third trend has been the growth of regulatory activity across Europe in response to the global financial crisis.

"Overall, the environment in Europe is getting closer to what we're seeing in the U.S.," said Spunberg.

But there are complexities inherent in the European markets, where there is an overarching EU government with regulations and guidelines, but there are also individual national governments with their own regulations and guidelines. This "may make it more difficult for companies to navigate" the differences in liability law, he said.

Spunberg added the global financial crisis and European debt crisis have had a significant impact on D&O and EPLI lines, particularly the latter, where the need for companies to cut costs and lay off workers can trigger worker claims.

"If there's any hint that the layoff or work reduction process was not handled properly, the likelihood to see more EPLI claims is much higher than it would have been in the past," he said.

On the D&O side, companies that run into problems raising capital or that are forced into bankruptcy run a higher risk of being targeted for claims, said Spunberg.

As far as claims handling in these lines, Spunberg noted the sheer volume that has to be managed for EPLI claims, which tend to be routine and easy to file, but can then "languish" in government agencies, followed by a lawsuit.

D&O claims tend to be much less frequent and the issues involved much more complex, he said. And because exposure tends to be higher, more resources and time must be spent on those claim.

Spunberg said the ability of D&O and EPLI underwriters to gauge their long-tail exposure is getting more difficult, but the complexity has more to do with regulatory changes than with the uncertain financial markets.

"This issues associated with companies failing and going bankrupt are well known," he said. "What is still being defined is what the repercussions of new laws will be on D&O."

Citing recent U.S. legislation such as the Dodd-Frank financial services reform act, the Lilly Ledbetter Fair Pay Act and the Patient Affordable Care Act, among others, Spunberg said "a lot of significant material litigation has come through over the past few years, and how it plays out with D&O policies is still to be seen."

Listen to the entire interview with Bertrand Spunberg at http://www.bestweek.com/v.asp?v=spunberg212

(By David Pilla, international editor, BestWeek: [email protected])