Managing Challenges in Professional Liability with the Right Data

While this year’s January 1 renewal was referred to as the ‘toughest in a generation’ by industry leaders around the world, largely attributable to Property classes, the subsequent April 1 renewals took on a more orderly note, with the imbalance of supply and demand seen at 1/1 showing signs of stabilizing.

However, it also demonstrated that there are still challenges to overcome in the re/insurance sector - in particular, the U.S. Financial and Professional Lines market came under pressure from reinsurers. Outcomes varied significantly based on portfolio mix, underlying rate activity, and development of the previous year’s losses, among other factors. Consequently, reductions in ceding commissions averaged at around 2%; portfolios with larger percentages of Public Directors and Officers (D&O) experienced greater commission drops, particularly when facing pressure around loss experience and rate expectations falling significantly short of plan.?

How should reinsurers and carriers be using data?

Following 4/1, carriers are looking to soften the impact of the rate environment for Public D&O insurance. We expect to see impacted carriers shifting their portfolio mix away from excess full-coverage ABC D&O policies, and towards more Private and A Side D&O participations where possible while also looking to grow the E&O classes where rate has held much stronger

Hard, granular data will be critical here in showing shifts in portfolio mixes, demonstrating to reinsurers that the better-performing portfolio segments are successfully offsetting the excess D&O segment, thus still presenting attractive margins against the capital they are deploying. In the current challenging economic climate, this ‘proof’ will be essential in making decisions around capital optimization and building trust with clients.

At the same time, data will also be crucial for reinsurers to inform their own views of prior and prospective loss ratios. Too often, reinsurers rely on industry or default views of certain lines and segments; using client-specific data would not only increase differentiation, but also enable reinsurers to make better informed decisions that truly help clients achieve their goals.

One example of this pitfall can be seen in the views that many reinsurers take of some of the more recent accident years in Public D&O: reinsurers and actuaries often discount the last 2-3 accident years, deeming them as too ‘green’ from a development standpoint. However, this leads to failure to account for some important key factors such as claim frequency, dismissal rates, and changes in the class action environment; while the compounding rate in the underlying D&O insurance market from late 2018 to early 2022 ranged between 75-100%, there was also a reduction in class action frequency. Factors such as these should not be minimized or ignored in actuarial analysis as they may exacerbate existing challenges or missed opportunities.

What’s next?

Even as reinsurers begin to take a more balanced look at the broader market across P&C lines, as evidenced in our April 2023 Reinsurance Market Dynamics Report, it’s increasingly evident that granular, client-specific data is more important than ever for reinsurers and carriers alike, rather than relying on outdated data and generalized assumptions. Not only will this enable more insightful and valuable analysis but using the right data will also help weather the current challenging market conditions and meet clients’ reinsurance goals for the next year.