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Chubb Exec: D&O Renewal Prices Up, But Not Enough

Source: Advisen


Posted on 23 Apr 2012

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Directors & Officers LiabilityWhen Chubb announced $0.5 billion of first-quarter income last week, executives reported generally "positive rate momentum" for commercial lines, including specialty liability lines, which rose 4 percent on average for renewals.

Still directors and officers liability insurance prices for public companies are not where they need to be, Chairman and Chief Executive Officer John Finnegan said, during an earnings conference call.

Finnegan and Paul Krump, executive vice president, noted the inadequacy of public D&O rates in response to an analyst, who said he was confused by Krump’s rundown of how that 4 percent was distributed to individual segments of Chubb’s Commercial Specialty Insurance (CSI) book—with public D&O getting the smallest pricing bump.

Krump, who is also president of standard commercial (Chubb Commercial Insurance) and specialty lines (CSI), reported that renewal rate hikes for the quarter were led by private company D&O, followed by nonprofit D&O, employment practices liability, crime, fiduciary, and then public company D&O.

“I would have thought the need [for rate] would be greatest in public,” the analyst said, asking why the actual pricing lagged for that segment toward the end of an earnings conference call.

“We have been pushing for rate in public in D&O, and a number of those accounts have been walking,” said Krump, although the two executives reported that for professional liability lines overall, retention levels have held steady—at 85 percent for first-quarter 2012 and fourth-quarter 2011.

Finnegan said: “You could have rate needs in a line of business, but it doesn’t mean you achieve rates in line with those needs….It’s like saying small cars are underpriced and big trucks are overpriced. There’s not much you can do about it.”

“We work at it, but it relates to the level of competition in the business,” he continued.

“We certainly need more rate than we’re getting in public D&O,” Finnegan concluded.

Krump noted that Chubb pays attention to “tiering,” not just rates. Explaining the concept, he said that for one-star accounts—those not viewed as particularly good ones—Chubb targets lower retentions. “We think that has as much of an impact or more as getting a large rate increase on a piece of less desirable business,” he said.

He added that Chubb is “shifting around the portfolio” as well, from primary to excess layers as well as coming off lower-tiered accounts. “Our pricing actuaries…give us as much if not more credit for our underwriting actions [as] just pure rate increase” in terms of improving the combined ratio.

Chubb reports financial results for D&O, employment practices, and other management liability under the heading “professional liability” within its CSI business unit, with surety making up the balance of CSI. Overall, CSI net written premiums dipped 6 percent in the quarter, compared to first-quarter, but a 27 percent drop in surety explained much of the drop. Net written premium for professional liability fell just 2 percent to $538 million, while the combined ratio for professional liability climbed to 98.5 from 86.8 in last year’s first quarter.

For all lines of business, Chubb’s combined ratio came in at a stellar 90.2, but like the professional liability result, the companywide combined ratio excluding the impact of property catastrophes was higher in first-quarter 2012—rising to 89.4 in first-quarter 2012 from 84.2 last year.

Finnegan and Krump attributed the worsening combined ratios to lower amount of reserve releases for prior accident years. For professional liability, in particular, Krump said that in addition to lower prior-year takedowns, the current accident-year combined ratio is being booked higher “given the prolonged soft market environment and continued weak macroeconomic conditions.”

“These factors are the reason for our aggressive drive for rate increases and other underwriting actions,” Krump said.

Finnegan later revealed that current accident-year combined ratio figure for professional liability was in the 103-104 range, with a loss ratio of 72 and a “seasonally high” expense ratio of 31. He said the expense ratio would probably drop 2 or 3 points later in the year.

As for pricing, both executives said Chubb is pleased average 4 percent rate hike on renewals for professional liability, contrasting the jump with a 1 percent increase of fourth-quarter 2011 and a 3 percent average rate decline renewals in first-quarter 2011.

“The 7-point swing reflects our push for rate,” Krump said.

But is 4 percent enough? Why not push for more? Why not let retention levels fall and new-to-lost business ratios drop, several analysts asked.

“Plus-4 is not enough,” Finnegan responded. “For a long time, it has lagged below zero [and] only went positive for first time in the fourth quarter last year,” he said, adding that a “sustained improvement in rates” is needed.

Still, he refrained from quantifying how much more rate is needed, noting that business is heavily impacted by systemic events, like the credit crisis, rather than predictable loss trends. Several recent accident years were affected by credit crisis. “You take away the credit crisis and all of a sudden those accident-year combined ratios are looking pretty darn good,” he said.

As to the question of pushing harder, “I think you understand this is a relationship business,” Finnegan said. “The day you’ve gone from [a] 98 to 101 [combined ratio], you can’t jettison 50 percent of your customers and hope to fight another day,” he said.

Overall, the executives said net income for the Warren, N.J.-based company in total—$506 million for first-quarter 2012, compared to $509 million for first-quarter 2011—on net written premium growth of 3 percent evidenced a “strong start” to the year, as well as continued positive rate momentum in all lines.

For CCI, net written premiums rose 6 percent, with an average renewal rate increase of 8 percent, compared to 0 percent in first-quarter 2011. Line-by-line, Krump reported that the greatest renewal rate hikes came in monoline property (double-digits), followed by workers’ compensation, general liability, package, umbrella, auto, boiler and marine.

Krump also said renewal retention for CCI dropped to 83 percent from 85 percent in fourth-quarter 2011.

Outside the United States, CCI saw low single-digit renewal price increases, but these were the best since 2004, Krump said.

In personal lines, Chubb reported a 5 percent jump in net written premiums and improving combined ratios (with and without catastrophes).


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