Agents’ E&O Marked By Stability, Satisfaction

Independent insurance agents have had plenty to fret about the past year, including falling revenues. Thus stability in the market and pricing for their errors and omissions (E&O) insurance meant there was one less thing many of them had to worry about.

More than 64 percent saw their 2009 E&O premium decline or stay the same as in 2008. Agents expect more of the same in 2010 — more than half do not think their premium will go up next year.

The 2009 installment of Insurance Journal‘s annual Agents’ E&O Survey revealed that agents are for the most part satisfied with their E&O carrier— nearly 74 percent have been with the same carrier for at least the last three years. Close to 65 percent said they were satisfied with the terms and conditions of their policies.

Compared to the 2007 and 2008 surveys, agents’ responses also pointed to a more stable line, with fewer indicating their premium had gone up. In addition, fewer respondents expect pricing to change significantly.

One of the surprising results according to Paul Osborne, a senior consultant with the actuarial, rating and consulting firm Demotech Inc. who helped with the analysis of the survey results, is the fairly wide gap in average annual premiums of agencies in the states with the most survey respondents-California, Florida, New York and Texas. Those states happen to be among the largest in terms of overall insurance premium volume. New York had a much lower average annual premium than Florida, which had the highest average annual premium of the four.

How Much Does E&O Cost?

For the majority of survey respondents, their annual E&O premiums run between $1,001 and $10,000: for 14.6 percent their cost of coverage was in the $1,001 to $2,500 range; 24 percent of respondents pay between $2,501 and $5,000 for their E&O policy; and 17.3 percent had premiums of $5,001 to $10,000. For 13.9 percent of respondents, the cost for their annual E&O coverage is more than $50,000 per year. For 2.9 percent of respondents their premiums are $1,000 or less.

A comparison of the four states with the most survey respondents – California, Texas, New York and Florida – showed that the average agency premium ranged between $13,256.41 (New York) and $21,744 (Florida). The average premium in Texas was $18,225.81 and $17,373.53 in California.

Demotech’s Osborne observed that there are quite a few responses yet New York has a much lower average premium than all those others. “I don’t know why that would be true but it is. . It could just be an anomaly.”

In the 2009 survey, 28.9 percent of respondents said their E&O premium decreased in 2009 from the level it was in 2008. In last year’s survey, 26.3 percent said their premium decreased in 2008 compared with that of 2007.

This year, 35.3 percent said their E&O premium remained flat in 2009 compared to 2008. In the 2008 survey, 29.7 percent said their E&O premium stayed the same compared to the previous year. In the current survey, 21.6 percent responded that the cost of coverage had remained flat over the past three years.

A little more than a third of the survey participants, 35.7 percent, said their E&O premium for 2009 increased compared to 2008. In the 2008 survey, 44.1 percent of respondents said their E&O premium rose in 2008 over that of 2008.

When asked in the current survey how the price of their E&O coverage has changed in the last three years, 51.4 percent responded that it had increased during that time. Nearly one-third of those reporting an increase in E&O premium during the past three years – 111 out of 375 – saw increases of 6 percent to 10 percent; 93 out of 375 reported their premium costs rose between 1 percent and 5 percent; 12 out of 375 respondents said their premium rose more than 40 percent.

This year, 27 percent said their E&O premium had declined during the past three years. Of those reporting lower premium costs during that period, 43 out of 176 saw a decrease of 6 percent to 10 percent; 37 out of 176 had their premium reduced by 1 percent to 5 percent. Only two respondents reported decreases of more than 40 percent in their premium costs over the past three years.

For 2010, 50.2 percent believe their E&O premiums will remain the same; in the 2008 survey, 43.1 percent responded that they believed their premiums would remain the same in 2009 as it was in 2008.

In the current survey, 35.2 percent responded that an E&O premium increase is likely in the coming year. By contrast, in last year’s survey, 40.7 percent believed they would see a year-over-year increase in premium.

This year, 14.6 percent of respondents indicated that they believe their premiums will decrease in 2010. In 2008, 16.2 percent projected they would likely have lower premiums in 2009 compared to 2008.

Carrier Changes

Most survey participants (73.7 percent) reported having been with the same E&O carrier for the past three years. For those reporting that they had changed carriers in the last three years, 27.3 percent said they switched for a lower price. Some of those reporting a change said their carrier withdrew from the E&O market (6 percent); others (5.1 percent) said they needed broader coverage; and 5.6 percent cited “other reasons.”

Roughly a quarter of agencies switched carriers. Almost 40 percent of those changing carriers had premium decreases. Only 25 percent of those who stayed with their carrier had a decrease in premiums. The people who changed carriers “didn’t report as much increase as the people who didn’t, so they probably changed to lower their premiums,” Osborne said. “It’s not rocket science – it’s what you would expect. Although it could turn out they changed carriers because they were dropped and they ended up with a higher premium, but it doesn’t really look like that was the case.”

According to Osborne, there was no correlation between the size of the agency and whether it changed E&O carriers.

I appears that consistency marked the underwriting of E&O in 2009. Well over half of respondents (64.1 percent) said their carriers had not implemented stricter underwriting requirements and exclusions during the last two years. In last year’s survey, 55.7 percent responded similarly.

The fact that little changed was fine with most agents. Almost two-thirds— 64.7 percent — said they were satisfied with the terms, conditions and limits of their E&O policy, while another 25.2 percent reported they were “somewhat” satisfied. Only 10.1 percent said they were dissatisfied.

Risk Management Opinions

Insurance Journal also asked survey participants about E&O risk management and related issues.

The majority of respondents, 62.9 percent, said their E&O carrier’s pricing of the agency’s policy reflects the risk management steps taken by the agency; 37.1 percent believe those steps were not reflected in the cost of their premium.

The majority, 56.9 percent, reported they have never made a claim against their E&O policy.

Another 52.4 percent believe other insurance agencies take E&O risk management seriously; 56.4 percent said their agencies had taken new risk management steps during the past year to reduce exposure to E&O claims.

Of the agencies that have reduced staffing levels during the past year, 76.9 percent said they were not concerned that fewer employees could lead to more errors by the agency. The remaining 23.1 percent of respondents indicated it is a concern.

A strong majority of respondents, 67.1 percent, said they believe independent agencies should be required by states to maintain a minimum level of E&O coverage. While 22.4 percent indicated there should be no mandates, 10.5 were not sure.

Asked if they would move their business from one of their established carriers if it were suddenly excluded from coverage under their E&O policy, 82 percent of agents answered yes. Another 58.4 percent indicated they were aware that coverage is available to protect insurance agencies from the insolvency of an insurer.

About the Respondents

Insurance Journal‘s E&O survey for 2009, conducted Oct. 14, 2009, through Oct. 21, 2009, drew 616 respondents from 49 states and the District of Columbia. There were no respondents from Vermont. The five states with the highest percentages of respondents were California (15.8 percent), Texas (11.9 percent), Florida (7.6 percent), New York (7.7 percent) and Illinois (4.9 percent).

Of the agents/agencies responding to the survey, 68.2 percent conduct business in one to five states; 14.2 percent do business in most states. The majority – 59.9 percent – have one to 10 employees and 50.2 percent of those responding said their agencies had been in business for more than 30 years. Total property/casualty premium volume in 2008 was less than $5 million for 45.9 percent of responding agencies; 19.0 percent said their agency’s P/C premium volume fell between $5 million and $10 million; and 14.5 percent had P/C premium volume between $11 million and $25 million. Only 3.8 percent responded that their premium volume was more than $200 million in 2008.

All of the respondents handled some combination of commercial and personal lines, with commercial lines slightly edging out personal lines in volume. For around two-thirds of the respondents, employee benefits accounted for at least some percentage of their agency’s total premium volume.

Fewer than half of the responding agents (47.2 percent) said their agency’s revenues rose in 2008 over 2007. By comparison, in the 2008 survey, 56.6 percent did.

Those who said their 2008 revenues decreased represented 35.5 percent of respondents, in comparison to 27.6 percent of respondents in last year’s survey. In the current survey, 17.3 percent said agency revenues remained flat in 2008 over 2007; that compared to 15.8 percent in 2007.

Of those indicating their agency revenues increased in 2008, nearly half (155 out of 348) said they had climbed between 1 percent and 5 percent. Another 116 pegged the gain between 6 percent and 10 percent.

Eighty-seven out of the 229 respondents who saw their agency’s revenues decline in 2008 indicated a decrease between 1 percent and 5 percent; 89 out of 229 said revenues declined between 6 percent and 10 percent in 2008.