New Players Enter the E&O Market … But Some Agents May Not See Rates Decline

Despite a rosier outlook in the agents’ errors and omissions (E&O) insurance market compared with years past, many insurance agents still faced rate increases in their E&O coverage in 2007 and anticipate further rate hikes in 2008.

New players are entering the market, putting pressure on established E&O insurers, but in a survey of independent agents conducted by Insurance Journal Oct. 29 through Nov. 2, 2007, 44.8 percent of those responding said premiums for their E&O insurance increased in 2007 compared to 2006. In addition, 66.9 percent noted premium increases over the past three years and 42.3 percent expect their premiums to rise in 2008.

With E&O insurance for agents, however, as in real estate, location is everything, explained Dave Hulcher, director of Agency E&O Risk Management for the Independent Insurance Agents and Brokers of America (Big “I”) Professional Liability Program. Whether an agent’s rate goes up or down in the current market is “going to depend on your jurisdiction and what kind of loss experience carriers have had in particular states.” For instance, agents in a state like Texas, which traditionally has had a greater severity of losses, may not benefit as much from more competition in the market as, say, agents in Iowa, he noted.

But there is more competition currently in the market than existed three to five years ago, or even last year.

“New insurance companies are getting into the line and marketing their projects to agents,” said David Surles, director of the Independent Insurance Agents of Texas Insurance Agency. “This competition has taken the form of reduced premiums or premiums that are lower than what they would have been for the same agency last year or two or three years ago and certainly five years ago.”

Surles noted that right now in Texas there are plenty of markets for E&O insurance for agents, which hasn’t always been the case. He suggested those experiencing or anticipating higher premiums may also be seeing growth in their agencies through higher premium volumes and additional employees. Such growth would affect the amount they pay for their E&O coverage, he said.

Hulcher agreed. “If you’re making more money, writing more business, have more employees,” rates are likely to go up.

Less Experience, More Pressure

Some of these new entrants are less experienced in the line, so they “price the business very aggressively and contribute to a softening of the rate in the market,” according to Jim Romano, co-owner of Insight Insurance Services Inc.

“At the same time, more established carriers that have been writing this business for a long period of time are maintaining pretty steady rate levels,” added Michelle Duffett, also a co-owner of Insight, an Illinois-based program administrator for agents E&O insurance from Safeco, as well as architects and engineers and accountants professional liability insurance for Everest National Insurance Co.

Duffett acknowledged that established companies may be sliding a little on rates for their best accounts, but overall rates are staying fairly stable. “Older, established carriers that take a long term view and have a lot of experience in terms of underwriting intellect and in terms of actual numbers know that there’s a level at which this business needs to be priced in order to stay in the line,” Duffett said.

Hulcher agreed that rates for carriers with a history in the business are “probably holding their own,” again depending on the jurisdiction and the kinds of loss experience they have had in particular states. The thing that agents need to be aware of with the new carriers coming into the marketplace, Hulcher said, is that while there is a potential for price reduction, “the reality is that they probably don’t really understand the business that they’re getting into.”

This “is a long-tail business,” Hulcher said. “If you’re just getting into this business you may not realize that.”

Still, the new players are putting pressure on the carriers that have been in the market for a long time.

“There is some differentiating on price and coverage,” Duffett said. “We are seeing some movement among the companies with underwriting discipline in softening and expanding the policy terms just a little.”

Hulcher said competition makes it clear to his operation that “we have to educate current policyholders that may be looking at their options and going out and shopping for insurance — educate them on the positive reasons to purchase their coverage from somebody that has got a long-term track record, that has a quality coverage form, that offers risk management services for their policyholders. So it kind of keeps us on our toes.”

Tie Premiums to Claims, Agents Say

The majority of those responding to the Insurance Journal survey (58.3 percent) reported they had not had an E&O claim against their agency. Many asserted that their premium levels should be tied more closely to their claims history. “Those who have claims should pay more,” said one respondent. Another maintained they should benefit from “reduced renewal rates, as we have never had a claim. But our premiums keep increasing.”

One suggested “a premium reduction of about 3 percent if [you had] no claims on your policy during the policy period. If a claim is paid on your policy then an increase should occur of about 8 percent. If you have been with your carrier for at least five years you should get a preferred rate or reduction of about 5 percent in premiums. This would help the agents be more interested, knowing their policy could go down if no claims.”

Others maintained that risk management initiatives should factor into their rate. A large majority (71.1 percent) said their agency had implemented new risk management initiatives over the past year in an effort to reduce exposure to E&O claims.

One respondent commented they would like to see “discounts for risk management procedures [and] more guidance on avoiding claims.” Others agreed they would like more carrier involvement in helping agencies avoid E&O claims. For instance, they want carriers to “provide training opportunities throughout the year to assist agents in preventing E&O exposures” and to recommend “guidelines to implement in order to keep premiums down.” Another wanted credits for agencies with “risk management check and balances in place.”

Buying the Coverage

Half (50 percent) of those responding to the Insurance Journal survey were from agencies whose total property/casualty premium volume in 2006 was under $5 million; 17.4 percent reported a $5 million to $10 million P/C premium volume; and 13.1 percent had a P/C premium volume of $11 million to $25 million. Only 3.7 percent of respondents reported P/C premium volume of more than $200 million in 2006. Most respondents indicated that employee benefits played some part of their total book of business.

The majority of participants reported paying annual E&O premiums under $10,000: 12.9 percent had premiums in the $1,001 to $2,500 range; 26.5 percent said their rate came in between $2,501 and $5,000; and 15.6 percent reported annual premiums between $5,001 and $10,000. However, 13.9 percent said they paid more than $50,000 for their E&O premium in 2006.

More than half (55.1 percent) said they purchase their E&O coverage through agent associations, such as the Independent Insurance Agents and Brokers of America and the National Association of Professional Insurance Agents and their state affiliates. That percentage rose slightly from last year, when 50.4 percent said they went to their agent associations for coverage.

The percentage of respondents stating they had stayed with the same E&O carrier over the past three years was up slightly in 2007 (67.9 percent) compared to 2006, when 62 percent of participants said they had not changed E&O carriers in the previous three years. Of those reporting they had changed carriers, 28.2 percent said it was to get a lower premium; 8.1 percent said they needed broader coverage, and 6.9 percent noted that their previous carrier had withdrawn from the E&O market. Only 1.5 percent said they had been nonrenewed because of claims.

When considering how much E&O coverage to purchase, agents should examine their book of business and ask themselves, “If something went very wrong and there were uncovered claims, what kind of limits do I need to cover to cover my business operation if there is an underlying claim?” Hulcher said. That answer would be very different for an agency that handles mostly smaller accounts than for one that includes among its clients a Fortune 500 company, he added.

What Carriers Require; What Agents Want

Most carriers require their contracting agents to carry a minimum of $1 million, Surles said. “Beyond that it should be an amount the agency is comfortable with.” He recommends agents consider the highest property amount limit or highest liability amount they write in their agency because that’s their exposure.

“If you forget one year to renew that big policy somehow, and the worst happens and the policy is not in effect, then that’s your exposure. If they have a $5 million claim on a $5 million umbrella that they had last year but you forgot to renew this year then that’s your E&O claim — $5 million,” Surles said. After that it’s a question of how much an agency can afford.

While 53.3 percent responded they were satisfied with the terms, conditions and limits of their E&O coverage, 14.9 percent said they were not satisfied and 31.8 percent reported they were somewhat satisfied. Just under half (46.8 percent) reported that insurers had implemented stricter underwriting requirements and exclusions in the past two years.

In addition to premium discounts for lack of claims and pro-active risk management policies, many responding agents said they would like enhancements in the policy for defense of claims if they occur. Defense outside of the policy limits was a recurring theme, as was choice of counsel.

One wrote that they would like “broader coverage so you do not have to worry whether or not a claim is going to be handled properly. Just like anyone else, if a claim is submitted, they expect to have it handled promptly, effectively and keep the insured informed.”

Another said, “I prefer a company, which in case of a claim, thoroughly investigates the claim and discusses with the broker the handling of it.”

Other agents said they would like more personalized underwriting and attention paid to the particulars of their business. “I’m looking for an underwriter that will review our agency for who we are and not ‘class underwrite,'” one respondent said.

Insight’s Duffett noted that with the P/C market softening across the board, agencies are diversifying and expanding their writings. “So we’re seeing traditional P/C agencies take on more life and health business, or more specialty business that’s placed on a surplus lines basis, and sometimes this causes us underwriting concerns depending on the nature of the placements and the background of the agencies,” she said. In some cases, she added, agents are hoping their carrier will look the other way while they venture into a new area where they don’t know what they’re doing.

In addition to the District of Columbia, agents from every state except Alaska responded to the survey. California had the highest representation (16.9 percent) followed by Texas with 14.9 percent. In all, 854 agents took part in the week-long survey.