Firmer insurance prices and an upward trend in agency revenues are signs of good times for most independent agencies. These same trends, however, are reflected in today’s insurance market for agency errors and omissions coverage where they can pose challenges for agents looking to buy protection.
While agency E&O prices are firming, experts say competition is still healthy and, according to some, likely to heat up.
“There is some tightening going on,” says Robert Sargent, president and CEO of Tennant Risk Services based in West Hartford, Conn. But for now, price increases in agency E&O remain moderate and fragmented, he says. “There’s still a lot of competition … it is underwriting results driven.”
Sabrena Sally, head of agency E&O in the United States, Swiss Re Corporate Solutions, describes the market as “mixed” when it comes to competition. This year brought a few new competitors to the agency E&O market, she said, but at the same time established agency E&O carriers increased their rates. As the year comes to a close, Sally expects competition to heat up again. “Carriers become quite aggressive towards the end of the calendar year,” she says.
Sally says she has seen rate increases filed with departments of insurance ranging from a low of 5 percent to a high of 18 percent.
Nearly half (48.9 percent) of all agencies responding to Insurance Journal’s 2012 Agency E&O Survey reported rate increases in their own policies in 2011 compared to 2010. Almost two-thirds (61.5 percent) said their agency’s E&O rates have increased steadily over the last three years.
Agencies don’t anticipate getting rate relief on their upcoming agency E&O renewal either. Half of all agencies (49.8 percent) responding to the survey expect an increase in premium at the next agency E&O renewal.
Gary Mann, director of professional liability for Fireman’s Fund, says in general the overall professional liability market is experiencing slight increases in rates and agency E&O is tracking the same in that trend.
Mann says professional liability tracks somewhat differently than the rest of the property/casualty marketplace. But the current market cycle appears to be different.
“Whenever the middle market and small market spaces firm, and soften, professional liability will sometimes lag and act independently,” Mann says. But that’s not happening now. Mann sees “firming in the middle market and small business space, and there’s a slight firming happening in professional liability as a whole, as well.”
Over the past 10 years, new competitors have come in and out of the agency E&O marketplace. As a new carrier enters, another leaves, according to Mann.
Right now, the number of carriers writing agency E&O is up, according to Curtis Pearsall, president of Pearsall Associates Inc., and a special consultant to the Utica National Agents E&O program. Pearsall, who also authors the monthly “E&O Insights” column for Insurance Journal, expects to see additional carriers entering the agency E&O market as well.
“I’m aware of a number of carriers that are looking to get into this market,” Pearsall says. “It is a line of business that carriers look to.” Pearsall predicts not only that the number of carriers doing business in the agency E&O market will increase over the next couple of years, but also not many will leave the market either.
There are some companies out there that are extremely aggressive, especially in the large agency sector. Pearsall says this is somewhat surprising because the large agency E&O market is also a sector carriers seem to be pulling back on.
With the competition and the rates for agency E&O both increasing, agency owners may find this a good time to shop around. But Pearsall says it’s important that agencies understand that policy forms vary considerably when it comes to E&O.
“Agents need to realize that no two E&O policies are the same,” Pearsall says. “If they look to place their coverage with a particular carrier, they should make sure that they understand the policy form and the commitment to loss control, how good the claims handling is going to be, etc.”
Despite the heightened competition, agency E&O prices are trending up and claims are part of the reason.
From a loss standpoint, the frequency of claims in agency E&O had been close to an all-time record low, Pearsall says. But that’s starting to change. “Nothing dramatic,” he says. “It’s still very, very positive numbers but there is a slight uptick with claim frequency and I think that’s going to continue to go up.”
According to the 2012 Agency E&O Survey, more than a quarter (26.6 percent) of agencies reported having at least one E&O claim in the past five years, but nearly half (45.5 percent) said their agency has never had an E&O claim made against them.
The recession has agency customers demanding more for their money and this is one reason there are more E&O claims, according to Pearsall.
“One of my concerns is the workload on the agency side of the business; it’s just so heavy right now,” he says. “The carriers are looking for the agents to do more, and the customers are, what I call, driving the agents crazy. Somebody will call: ‘My homeowner’s went up 10 percent or $10, what are you going to do about it?’ And it’s forcing the agents to re-market a lot of this business, which causes a lot of workload at the agency side of the business.”
In this environment, some things fall through the cracks, he says. “Over the last couple of years, the re-marketing of business and the workloads, I think are at the root cause of the increase in some of the claim frequency numbers.”
Fireman’s Fund’s Mann agrees that the economic downturn has had an effect on claims trends.
“E&O claims seem to mirror those of the middle market space, so typically if you have middle market experience a greater volume of claims, then E&O claims are going to mirror that but it’s probably going to lag by 12-18 months,” Mann says. And it makes sense, he says. “If the general insurance space had an increase in severity and frequency … there is going to be mistakes made and errors made on policies written by agencies.”
Swiss Re’s Sally believes the recession spurred an increase in workload on agencies, but she is not convinced that that has led to more agency errors.
“The largest driver of claims against insurance agencies continues to be just failing to get coverage as requested. That’s been historically true probably over the last two decades,” Sally says.
“Customers looking for ways to save money may ask for a lower limit, or they may decide to drop a certain coverage,” Sally says. But they “may conveniently forget that at the time the claim is made,” she says. She said her claims department has seen “a little uptick” in that type of agency E&O claim.
But she doesn’t attribute that trend to the economy. “With a lot of vacant homes out there, a lot of things can happen,” she says. “Frequently the homeowner simply doesn’t tell the insurance agent that the home is vacant. A homeowner’s policy, the coverage it provides, is much different than what would be provided to a vacant dwelling. That’s caused some increase in frequency of claims against agents.”
Agents who do a good job of documenting files can often avoid a lawsuit. Even if a lawsuit is brought against the agency, if documentation is correct then the agency’s E&O carrier has a very defensible case, Sally says.
“We also see that more often than not it’s a producer or an account exec or a CSR that’s involved in the claim, which is not surprising,” Sally says. And most often an error occurs when they’re writing new business, she says.
Commercial lines continues to be the area that experiences the most agency E&O claims, according to Mann. “Claims are higher in severity and have more frequency,” he says. The most common claims include failure to provide coverage, failure to provide adequate limits, and failure to replicate previous coverage.
Agents vs. Carriers
As if E&O claims filed against them by customers is not enough of a worry, agents are also facing another trend. Increasingly, say the experts, they are being sued, not just by agency customers, but by one of their own carrier partners trying to avoid a loss.
Fireman’s Fund’s Mann says he is seeing increased claims where there is action from the carrier back against the agency. “That seems to be a growing trend,” he says. “Where the carrier sustained a loss and then they may sue the agent for that loss on the basis that the application was incorrectly filled out or there was information that was withheld during the application process or something of that nature.”
Carriers with disappointing financial results may be the most likely to pursue this strategy.
“A lot of carriers are under increased stress because of their performance over the past three years,” Mann says. “Their loss ratios are really putting them under a lot of pressure for improvement. And particularly with very large losses you can see actions back against the agents where the carrier is trying to recoup their losses.”
Swiss Re’s Sally, agrees:
“Over the past several years we have seen an increased frequency of carriers being less willing to make agency accommodations (pay a client’s claims when the circumstances of coverage might be debatable), less interested in contributing to a settlement, and more willing to pursue action against the agency when the carrier alleges that the agency made misrepresentations on the application or other information provided to the carrier, or when the agency allegedly violated the carrier/agency agreement.”
Tennant Risk Services’ Sargent hasn’t himself seen carriers becoming more aggressiveness in pursing losses from their agents, but he says such a shift in attitude would be consistent with a tightening market.
“Carriers will go after their agents even in a soft market,” Sargent says. However, Sargent believes carriers consider carefully whether to pursue their agent partners in a lawsuit.
“A lot of factors go into the consideration and the decision-making process is not easy,” Sargent says. “Factors obviously include the relationship (size, loyalty, longevity, etc.), but also include the order of magnitude of the loss and their perspective on what the relationship might be going forward.”
While the trend is not new, Pearsall also agrees that carriers today are more willing to pursue actions against agents.
“Typically, it is where the agent has: bound the carrier to a risk that is outside of the underwriting guidelines or misrepresented on the application the exact nature of the risk,” he says. “This issue will only increase, especially in a hard market.”
The litigation process can also have an impact on an agent’s liability.
A carrier could decline coverage based on material misrepresentation on the application, and then the insured could pursue the agent directly, according to Sargent.
“The biggest claim I was ever involved with was close to this situation — a declination for material misrepresentation (among other things). The carrier left the agent to deal with the problem, and the agent paid a large sum. Unfortunately for the carrier, the insured pursued the carrier for bad faith, and won a huge award. So the process and outcome are never easy to predict,” Sargent says.
Future of Agency E&O
These experts predict that there will be more pressure on rates and more competition in the agency E&O market in the future.
“It’s that unique time in the market where people have to work hard to find an appropriate deal, but they’re there,” Sargent says.
Today’s agency E&O market is driven by the characteristics of the agency, he says. “Certainly, a traditional, medium-sized agent or broker that’s never had a claim is going to be in a very different spot than a start-up agency or an agency with a bunch of claims.”
Pearsall expects that the long-standing agency E&O carriers will continue to look closely at their books of business and identify what areas perform better and what areas don’t. He sees carriers making changes to agency E&O coverages or changing risk appetites in the future. “Larger agencies, those $100 million-plus size accounts, seem to be an area that many companies are de-emphasizing from an E&O standpoint,” he says.
Fireman’s Fund’s Mann sees the industry assessing healthcare reform and how that will impact agencies that sell health insurance and employee benefits.
“Agents are changing fee structures and they are really trying to determine how their business models are going to continue going forward,” Mann says. “That’s going to the emphasis of agency management over the next 12 months irrespective of the elections.”
The services that agents provide to their insureds could change when administrating enrollments, he says. “They could be providing consulting services; they could be advising exchanges that the employers are participating in, and so that is a little bit different than what their traditional role has been. It’s more of a consultative role vs. a sales role.”
From an agency E&O standpoint, that change could be questionable in the future. “I think the coverage that we provide now will provide adequate coverage for that exposure,” he says. “That’s good, but as we go forward we are going to continue monitoring that portion of the industry to make sure that our coverage language properly addresses that area.”
Swiss Re’s Sally says she too will be watching how an insurance agent’s role will change under the new healthcare law.
“What will the role of a ‘navigator’ be and will insurance agencies be involved in that process somehow? And if so, what will their legal obligations be?” she asked.
She says carriers will also be monitoring future changes in technology, although those are the most difficult to predict.
Above all else, carriers will be monitoring the effect of the market cycles on insurance agency E&O, she says.
“Over past market cycles, we had experienced that the frequency of claims against insurance agents increased when the market hardened,” she says. “As the overall P/C market hardens, there’s lack of availability of coverage, restricted terms and conditions, and that leads back to allegations of failure to provide coverage. So that’s something that we try to monitor and keep our hands on the pulse.”