2008 Seminar on Reinsurance:
Professional Liability
May 20, 2008
Agenda
Section 1
State of the Lawyers Professional Marketplace
Section 2
Reinsurance Discussion
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Section 1: State of the Lawyers Professional
Marketplace
 Large Firms
 Small Firms
Large Firms
The Market for Lawyers’ Professional Liability
 “Large” defined as more than 50 attorneys
 4Q2007 signaled first significant softening of LPL market since 2006 peak
• 5-10% rate reductions were common in late 2007
• Expect to see continued reductions in 2008
 As in past cycles, the LPL market has lagged the D&O market
• Law firm losses tend to develop more slowly than D&O losses and premiums as
the firms are not typically party to initial litigation
• Delay also driven by lag before new capital enters
– LPL substantially smaller than D&O market
– Law firm losses not reported publicly
• 2007 was notable for the increase in insurer capacity
 Multi-year coverage is becoming more available
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Marketplace Conditions
 Large law firm losses relatively benign 2003 – 2007
 1999 – 2002 characterized by greater frequency of severe losses
• Financial failures of law firms’ client due to corporate malfeasance
• Economic downturn in the late 1990’s
• Tax shelter work done by a few firms
 Law firm claim frequency remained well below D&O frequency
• Financial scandals that generated D&O claims did not include LPL
– Central Bank of Denver protections
– Stoneridge Investment Partners LLC v Scientific-Atlanta, Inc decision
• Other D&O loss categories have generated few, if any, LPL claims:
– Laddering
– Options backdating
– Subprime/credit crunch
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Large Settlements Since 1986
Settlements by Year
Amount
20M - 30M
>30M - 40M
40M - <57.5M
57.5M - <100M
100M +
1994 & prior
8
3
4
0
0
1995-1999
6
2
2
0
0
2000-2004
7
1
0
0
1
2005
2
2
1
1
0
2006
2
0
1
0
0
2007
0
1
0
1
0
One in each cell was reversed on appeal.
 Severity today generally remains below $50M ceiling established in the LPL cycle of
the late 1980’s to early 1990’s
• Largest claims from tax shelters
• One hedge fund bankruptcy/fraud situation in early stages
Source: Data compiled by Aon Professional Services Group from publicly reported information.
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Underwriters Concerned About Future Losses
 Economic downturn
• Increased frequency and severity may follow
• Business deals and transactions fall apart
• Certain areas of practice more active (e.g., bankruptcies)
 Ramifications of subprime meltdown/credit crunch
• 236 subprime lawsuits as of 3/17/08, 1 legal malpractice*
• As of now, not seeing any LPL lawsuits related to subprime
 Hedge funds and private equity work
 Litigation exposures arising from e-discovery
*Source: Industry Focus, April 2008; Advisen Ltd.
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Small Firms
The Market for Lawyers’ Professional Liability
 Rate softening varies
• Solo practitioners – holding fairly steady
– Policyholder dividends
• As size of firm increases to 35-50, commercial markets more interested
– Rate decreases as high as 10-15% or more
 Frequency varies, but generally flat to decline with some instances of increase
 Severity increasing at 3-5%
 Deterioration in real estate area of practice
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Underwriters Concerned About Future Losses
 Economic downturn (same as large firms)
• Increased frequency and severity may follow
• Business deals and transactions fall apart
• Certain areas of practice more active (e.g., bankruptcies)
 Real estate area of practice
• Particularly on east coast
• Title agents E&O cover as endorsement to LPL policy
• High paralegal to qualified attorney ratio – bucket shops for title closings without
adequate supervision
• Around 15 states where lawyers combined the title closing function
• States where speculative or second home purchasing heavily exposed (FL, SC)
 “Subprime” itself not necessarily concern as much as devaluation of assets and
business failings
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NABRICO Analysis
 Analyze surplus growth for Lawyers Professional Liability writers
• NABRICO carriers write Lawyers Professional Liability
– Examples: Lawyers Mutual Insurance Company (CA), Wisconsin
Lawyers Mutual Insurance Co., Illinois State Bar Assoc. Mutual
• Difficult to analyze Commercial lines carriers that write LPL
– Examples: CNA, Zurich, Great American
– No unique Annual Statement Line
 Understand the drivers of surplus growth
• How much from operating income (underwriting and investment)?
• How much from capital contributions?
 Understand the drivers of operating income
• Underwriting income and prior year reserve development
• Investment income yields and asset distributions
Source: Data from SNL compiled by Aon Re
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Total Change in Surplus
12%
10%
8%
6%
4%
2%
0%
2005
2006
 Total surplus up $33M from 2005 to 2006
 Total surplus up $23M from 2006 to 2007
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2007
Components to Change in Surplus
10%
8%
6%
4%
2%
0%
-2%
-4%
2005
Net Income
2006
Net Paid In
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2007
UR Gains
Other
Components Net Income
15%
10%
5%
0%
-5%
-10%
2005
2006
Net U/W Income
Federal Income Tax
2007
Net Investment Income
Dividends to PH
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Components Underwriting Income
6%
5%
4%
3%
2%
1%
0%
-1%
2005
2006
Prior Year Reserve Development
Net U/W Income Before Prior Year Reserve Development
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2007
Return on Invested Assets
7.5%
5.0%
2.5%
0.0%
2005
2006
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2007
Distribution of Assets
100%
80%
60%
40%
20%
0%
2005
Bonds
2006
Stocks
Cash
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2007
Other
Section 2: Reinsurance Discussion
 Medical Malpractice
 Lawyers Professional
Medical Malpractice Reinsurance Observations
 More than enough capacity, with more coming in
 Disconnect between supply and demand
 Bad faith, ECO/XPL
• Connecticut: $38.5M
• Florida: $21M, $10M
• Illinois: $24M, $12M
• Iowa: $13.5M
• Maine: $8M
• Massachusetts: $26M
• New Jersey: $19M
• Wisconsin: $23M
 Systemic, batch and aggregation
 Awards-made coverage
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Lawyers Professional Reinsurance Observations
 Stable to growing capacity, depending on the market segment
 Large firm LPL usually combined with D&O and other E&O programs, but sometimes
stand-alone
 Small firm structures similar to PIAA
 More discussions regarding systemic type exposures and coverages – still mostly talk
 Rate relief and broader terms for “best in class”
 Increased actuarial involvement by all parties to the transaction
 Increased interest from the Bermuda market
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