MarketScout Barometer Shows Continued Softening in Professional Liability Market

MarketScout has analyzed the submissions from its agency network in an exclusive market evaluation on behalf of the Insurance Journal. Additionally, MarketScout conducted in person interviews with various industry leading professional liability un-derwriters and brokers. As further confirmation of its findings, The National Alliance for Insurance Education and Research performed surveys for MarketScout at various institutes across the country where it requested market opinions and experience related to professional liability coverages.

The result of the analysis conducted by MarketScout confirmed a continued softening of the professional liability market, with overall reductions of 6 percent. Directors and officers coverages were down almost 5 percent, employment practices liability insurance coverages were down 7 percent, and general errors and omissions coverages for industry groups such as lawyers, accountants and realtors have softened a bit, with premiums down 4 percent. Insurance agents E&O coverage was up 3 percent.

As a result of the tough hurricane season, many insurance company executives are trying to drive rate increases on all lines of coverage. However, at the time of this report, it is not working. MarketScout is not seeing an impact on professional liability rates as a result of Hurricanes Rita and Katrina. Professional liability underwriters are analyzing their account portfolio based on individual profitability and are making adjustments accordingly. Those adjustments are made on a broad basis for common exposures, such as accountants’ E&O or public officials’ D&O. However, for large D&O accounts, each risk is specifically underwritten. The merits of management, prior losses and future activities govern underwriters’ decisions regarding pricing for medium to large D&O.

There are a number of new D&O facilities becoming available. As a result, the D&O market continues to soften. However, some industry experts believe new reinsurance underwriters do not support the additional market capacity, and the capacity being used by those new facilities is coming from existing reinsurers. The new facilities are more aggressive as they try to carve out market share. The aggressive stance of those new facilities could produce losses that are absorbed by the same reinsurers that are writing existing insurance contracts.

That restriction on new reinsurance capacity may well result in a hardening D&O market, as losses accumulate for those new facilities. However, the market may feel pressured to soften if the new D&O facilities secure independent reinsurance contracts from companies that are not over-exposed with other offerings. Without legacy issues, a new D&O insurer will benefit from more stringent accounting and management standards, post Enron and WorldCom. In fact, some underwriters believe writing D&O after 2004 is an excellent risk.

EPLI or employment practices liability insurance is widely available from many insurers, either on a monoline basis or in conjunction with other “packaged” coverages.

Underwriters are generally making a profit from EPLI, thus the reason for an abundance of offerings. Why? Almost all U.S. companies, large or small, recognize the importance of proper human resource management. Therefore, a continued downward trend for EPLI pricing is expected.

Miscellaneous E&O coverage is available from many insurers as well. Pricing trends for that coverage is dependent on the group loss experience for each industry segment, i.e., realtors or accountants, for instance. Based on the latest trends, any of those industry groups will enjoy a modest reduction in E&O pricing.

Richard Kerr is the chairman and CEO of Dallas-based MarketScout, an electronic insurance exchange which underwrites and distributes hundreds of product lines to its 51,000-member agency network across the United States. More than 40 “A” rated carriers participate in the MarketScout exchange platform at