Premiums, Claims Severity on Rise in Architects & Engineers Market: Survey

March 27, 2015

For the third consecutive year, most insurers providing professional liability insurance for architects and engineers saw their premium rates increase modestly in 2014, as expectations of larger rate hikes were tempered by steady competition.

A new survey by insurance broker Ames & Gough finds a majority of these insurers are anticipating further modest increases this year, albeit at levels below their gains in prior years.

According to the Ames & Gough survey of 14 leading insurance companies (which, on a combined basis, represent more than 75 percent of the overall marketplace providing professional liability insurance to architects and engineers in the U.S.), 64 percent had rate increases last year, 29 percent had flat rates, and one insurer lowered its rates. The survey revealed that the size of any increases achieved in 2014 were significantly below insurer expectations at the start of that year.

For example, as 2014 began 22 percent of insurers planning to raise rates expected to see increases of 6 percent to 10 percent; however, only one insurer actually had such gains. The majority (88 percent) of these insurers had actual increases of 5 percent or less.

This year, eight of the 14 insurers surveyed are planning increases; six expect to keep rates steady. Of those planning higher rates, 87 percent expect increases of 5 percent or less.

“While the professional liability insurance market generally remains competitive, insurers are sharpening their focus on sound underwriting and carefully assessing the performance of their overall book,” said Dan Knise, president and CEO of Ames & Gough. “In this environment, many insurers continue to vie for relationships with smaller design firms, considered by underwriters as lower risk, and those with a good loss history and well-established and documented risk management programs.”

The survey showed that half the insurers planning increases consider rates to be inadequate, primarily due to successive years of premium reductions from 2005 – 2011. Some 25 percent cited historic claims experience (losses going back more than two years), and one insurer each pointed to loss experience with in the past two years, inflation, and underwriting criteria as reasons for seeking higher rates.

Insurers responding to the survey remain committed to the architects and engineers professional liability insurance market and capacity remains stable.

For any individual qualified insured firm, two of the insurers surveyed can provide up to $25 million in limits; two, up to $15 million; two, up to $10 million, and four are willing to provide up to $5 million in limits for an individual account. In addition, with multiple insurers able to participate on any individual firm’s program, larger publicly traded design firms can access $100 million in limits or more.

Claims Costs

Insurers also are keeping a watchful eye on factors driving up claim costs. While claim frequency appears in check with only 7 percent of those surveyed experiencing more claims last year, the size of average claims are up — 43 percent reported higher claim severity last year. While respect to claim costs, 36 percent of the insurers surveyed cited increased defense costs as an emerging cost driver. As to their largest single claim payment in 2014, 71 percent paid a claim of $1 million or more, including 14 percent reporting their largest claim was between $10 million and $19 million.

“A/E firms need to keep a watchful eye on any trend toward higher claim severity,” said Mike Herlihy, executive vice president and partner in the Ames & Gough Boston office. “Notably, firms renewing their insurance programs should double-check if their limits are adequate. Today, we’re seeing many smaller firms purchase limits as high as $5 million either to satisfy client requirements or because they recognize the risks are greater.”

From the insurers’ perspective, rate changes for an individual account may be driven by a number of considerations, including type of projects, historic loss experience, recent claims experience and type of work/service. Among the types of projects raising concerns by insurers are those involving schools, water works, and condominiums.

“As the economy continues to improve, many design firms are expanding their business, in some instances taking on projects that underwriters tend to view as higher risk,” Knise said. “As they strive for growth or income stability, A/E firms should understand how client selection might affect their risk profile and insurance costs. Besides assessing changes to their project mix, they need to maintain sound overall risk management, including careful review of contractual agreements, effective project management, and proactive client communications and claim reporting.”

To obtain a complimentary copy of the Ames & Gough survey, “PLI Market 2015: Most Insurers Seek Stable Rates Amid Competition,” email: info@amesgough.com.

Source: Ames & Gough

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