How and When to Shop for Agency E&O Coverage

By | December 9, 2014

While many insurance agencies stick with their agency E&O carrier for years, those that do shop around tend to do so when premiums are rising and, according to a recent Insurance Journal survey, more agencies are shopping around now.

Premiums for agency errors and omissions (E&O) insurance have been rising. According to Insurance Journal‘s exclusive 2014 Agency E&O Survey, 56 percent of agencies saw E&O premiums increase in 2013 compared with 2012, when only 52.3 percent of agencies saw an increase.

The latest survey revealed that 54 percent expect E&O premiums to increase again at the next renewal.

The survey found that 61 percent of agencies have had the same E&O carrier for at least the past five years, and 33 percent have had two carriers in the past five years. However, of those that shopped E&O markets, 25 percent said the reason they shopped was for a lower price.

Deciding to Shop

It makes sense to periodically shop agency E&O coverage but price alone should not drive the decision to move, according to the experts.

“A change in carriers requires a thorough review of policy terms and the assistance from an experienced E&O broker can be essential,” said Christopher Lucas, account manager, agents and brokers E&O, for Dealey, Renton & Associates (DRA) based in Oakland, Calif. DRA is an exclusive marketing agent for the Liberty Mutual Insurance Agents E&O Program and currently places coverage for 450 agents and brokers in California and Arizona.

Curtis Pearsall, president of Pearsall Associates Inc., a risk management consulting firm specializing agency E&O, and a special consultant to the Utica National Agents E&O program, agrees that from time to time it is good for an agent to shop to keep its current carrier honest but he doesn’t recommend agencies shop every year.

“I certainly think there is value in shopping but then you have to look at the price differential,” he said. If moving to a new agency E&O carrier means savings of only 5 percent to 7 percent, Pearsall questions whether that’s enough.

If it’s a 25 percent savings, that’s a different story, but agents should consider the value a long-term E&O partner brings to the table, he added.

“I know a number of agents that can say they’ve been with the same E&O carrier for 40 years and they would never even think of moving because it’s not the kind of thing they even want to think about,” he said. “They want to think about running their agency.”

Remember E&O When Buying or Selling an Agency: Pearsall

What many agents want from an E&O carrier is solid security. “They just want to know that if something happens, that they’re with a carrier that’s going to fight hard to protect their professionalism,” Pearsall said. “That’s something that agents need to put a value on.”

Changing E&O carriers is a significant decision for an agency, said Lucas, and part of this decision should include consideration of the effect a claim could have on the relationship with the agency’s E&O carrier.

“Claims happen, and when they do could you benefit from having a longer-term association with your carrier? Absolutely,” he said.

Sabrena Sally, head of Swiss Re Corporate Solution’s U.S. Agents E&O program, which serves as an underwriting carrier for the Big “I”‘s Professional Liability Program, doesn’t see a need to move agency E&O at all – as long as an agency owner is satisfied with their market’s performance.

It’s no different than personal insurance, she said. “If you’re getting the coverage you need for the exposures you have at a fair price and you’re satisfied with the claim service if you’ve had a claim, and there’s been no change in the financial stability of your carrier, I question why anyone would want to shop,” Sally said.

Right Market

Agencies looking for E&O insurance today have lots of choices if they decide to shop around. Yet not every market is the right market for every agency.

Given the diversity of independent agencies, making sure that the coverage is properly placed with the right carrier, with the right coverages, is critical, the experts say.

“There are so many different types of agencies,” said David Derigiotis, corporate vice president and director, Professional Liability Center of Excellence, at Burns & Wilcox. “Whether it’s an MGA, or a retail agent handling property/casualty, a life and health agency, an agency specializing in variables and annuities, a large super regional broker that’s been in business 30 years, or a one-man shop who’s independent – their exposures vary,” he said.

Aligning various exposures with the right coverage can be a daunting task in a market with many options but there are factors to guide agencies in their shopping.

According to DRA’s Lucas, experience maters. “While increased capacity can be perceived as a good thing, I think it is important to recognize the importance of an experienced carrier with a proven track record of commitment to the E&O marketplace,” he aid.

Lucas also recommends that agencies consider a carrier’s longevity in the agency E&O market. While agency E&O markets are plentiful, a new carrier may barge into the marketplace by underpricing risks only to make an abrupt exit in a few years when claims start to exceed projections and its book becomes a surplus drain.

Pearsall advises agents that may be considering a move to read their E&O policiy carefully to make sure the new carrier will provide the same breath of coverage.

“When you get into agency E&O there are some similarities but there are a lot of differences that agents need to be aware of,” he said. “At times agents fall into the trap of moving their E&O from one company to another, and saved some money, but maybe the reason they saved some money is because they got a form that is inferior to the one they had prior.”

At a minimum, agents should look at: The definition of – who’s an insured? What constitutes a claim? What is the extended reporting-period option in case the agency is considering to buy, or sell, an agency? Is the agency covered for what it does?

“Are there things that you are doing, coverages that you are selling, that are not covered by your own E&O policy? When do you want to find out? Do you want to find out after the claim or before the claim?” Pearsall asked.

“They need to read their policy and talk to their agent and/or the E&O carrier or whoever they are dealing with in the purchase of that and ask some questions to make sure they understand their E&O policy,” Pearsall said.

Agency E&O is the most important coverage that agents buy and they should “take the time to make a good, solid educated decision,” according to Pearsall.

Carrier Perspective

The best agency E&O markets are looking for the best agencies to insure. So what makes a good E&O risk? It boils down to how well agency owners run their shops, according to Burns & Wilcox’s Derigiotis.

“It really comes down to the risk management and overall operations in an agency,” Derigiotis said. “That’s more important than anything else. Is the agency well run? Are they a well-oiled shop?”

According to Derigiotis, the best E&O agencies properly document everything. They train employees and have expertise for all the products they sell.

Well-run agencies also have standardized procedures. “They have standardized ways of documenting information, whether it’s discussions with their clients, or having a checklist of various coverages that have been covered with clients. They document the kind of insurance and coverage that their client is declining,” he said.

Carriers consider a number of factors when determining what makes a good E&O risk, according to Pearsall.

Quality of People

The quality of the agency’s staff is a top consideration when it comes to E&O underwriting. “Agencies don’t make mistakes – people do,” Pearsall said. “The quality of people you hire is very important.”

How the agency markets itself is another important consideration, according to Pearsall. “How are you promoting yourself, what kind of business are you looking for, are you trying to write everything?”

Pearsall cites additional considerations including the quality of the agency’s policies and procedures, the agency knowing what business it wants to write, and strong documentation protocols. New agencies can be especially vulnerable and should consider these key issues to get started on the right track, he said.

The best agencies to insure have top leaders who live and breathe risk management, said Swiss Re’s Sally.

“When we look at underwriting an agency, the things we look for that point toward good performance outside of a positive claims history is an agency that has an established management that’s engaged in risk management,” Sally said. “You look for low turnover of their staff and staff that carries designations, which indicates an interest in continuing education. You look for an agency that has established procedures. And if you dig further, agencies that engage in self audits to monitor their procedures, keep those current, make sure they’re being used the same way by everyone.”

The very best agencies to insure from an E&O standpoint might even spend extra time and expense to work with an external consultant to review agency operations.

“That would demonstrate more engagement in risk management,” Sally said.

Lucas agrees that a commitment to risk management is essential. He said this can be demonstrated through involvement in professional organizations and continuing education on E&O in addition to having standardized agency procedures.

Underwriting Details

Detailed reporting of an agency E&O risk to underwriters also helps locate the best market for coverage.

“There is a place in the rating formula for every piece of information requested on the E&O application,” DRA’s Lucas said. “The application is the primary tool the underwriter utilizes to understand your agency and so it is prudent to take great care in its completion.”

Agencies handling standard lines of business placed with admitted carriers are the most marketable agencies, but Lucas says that providing detailed descriptions of business written in high-hazard lines and non-admitted markets can be helpful in opening doors for other agencies.

Claims history is always important, however, even agencies that have experienced a severe claim – but have taken steps to reduce the probability of a similar claim occurring in the future – may still be considered a good E&O risk.

At the same time, agencies with a high-frequency of small claims might be less desirable to underwriters. “The thought process here is that it may be only a matter of time before the agency with a high claims frequency experiences a severe claim,” Lucas said.

According to Insurance Journal‘s 2014 Agency E&O Survey, while half of all agencies (50 percent) indicated they had never had an E&O claim, 31 percent reported having an E&O claim within the past five years.

Less than a quarter (23 percent) of survey respondents said their agency increased E&O limits in the past three years. The vast majority (76 percent) revealed they had not increased E&O limits.

When all is said and done, the most important factor may be an agency’s direct appointments and close relationships with its carriers.

“It is these relationships that often determine if an incident will rise to an E&O claim,” Lucas said.

The exclusive IJ survey is based on responses from 569 agency owners across the country from Oct. 1-15, 2014. Insurance Journal wishes to thank Demotech Inc. for providing analysis once again for this year’s Agency E&O Survey.

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