Architects & Engineer Class Held Hostage by Price Cutting, Overcrowding

Even with historically low rates, tough competition, and a reduction in business, the architects and engineers professional liability class is still very highly sought after, with new players jumping in regularly.

Some established liability players have been frustrated as capacity continues to increase and rates continue to decrease.

“When I started in this line in 1997 there were probably 14 to 16 carriers who wrote this class of business and now there are in excess of 50 to 55,” says Larry Moonan, president of Arrowhead General Insurance Agency’s Architect and Engineers Division in Monterey, Calif.

Agents say that players in this class that are trying to maintain underwriting discipline are under a lot of pressure because there are those that play the rate game and price too low for too much coverage.

“There are lots of people out there putting out limits of $1 million on a single policy and have a total premium volume of $4 or $5 million — you can’t get to critical mass with that volume,” says Moonan.

However, Moonan says Arrowhead, a program manager, has actually been able to benefit from the situation.

“Markets who want to stay in the longer term are trying to deal with the rate pressure because we are in an extended soft market cycle,” he says. “They are starting to re-underwrite their books and are finding out which segments are causing problems and taking corrective action. We have been able to take advantage of that and write some new business.”

Lisa Doherty, president of the brokerage Business Risk Partners in Windsor, Conn., says the combination of the bad economy and extended soft market has kept A&E liability rates low, and she only sees selective tightening by geographic region so far.

“Almost every A&E underwriter rates on revenue and the vast majority of architects’ and engineers’ revenues are down, so rates from that perspective are dropping,” she says. “Then you add the soft market and people are dropping premiums and being more competitive.”

Moonan agrees and doesn’t see a hard market for this class anytime soon.

“My personal belief is we will see some kind of shake-out that will pick up steam in terms of smaller players that are newer entrants that decide they don’t have the stomach over the long term and take their capital and go elsewhere,” he says. “Rate increases depend on the economy; even if carriers see they need a 15 or 20 percent rate increase, the marketplace may not sustain that right now.”

One thing that attracts new players to this class but could also influence whether they can stay in it is the length of the tail on architect and engineer policies, typically four or five years.

“When there is excess capacity and companies need to put that into play they dive into long tail lines,” says Moonan. “Carriers believe when entering the market they will do well and ultimately find out they don’t have the intellectual capital or the right access to the market in terms of distribution, etc. In a long tail line claims won’t materialize for several years giving companies a false sense of security before results develop.”

Doherty says this is why it is so important for agents to do research when writing these policies.

“I think the biggest thing we are really concerned about is picking up certain exposures,” Doherty says. “People tell you what their revenue is today and their services today, but you don’t know [for example] that four years ago they did architectural work because it’s not in the application.”

She says with architects and engineers bringing in less revenue right now, an underwriter could write a policy for much less than what is needed and with a retroactive date that goes back several years. This exposes the insurer to higher losses if a claim comes in.

Agents need to take precautions when writing a policy, such as visiting a company’s Web site to get an accurate picture of what work the firm is doing, and what it has previously done.

“We spend a lot of time keeping records of risks we have written,” Doherty says. “The big boom bust states where you know things have changed dramatically, you have to ask the questions, ‘What were you doing two years ago? What were your revenues?'”

More New Companies, More New Coverage

One new carrier entering the A&E field this year, Protective Specialty, says it is taking a slow and steady approach, hoping for long-term success.

“It is not our goal to buy business and we are not out there trying to cut rates further just for the sake of competition. We are trying to do it the right way,” says Nathaniel Aiken, director of professional liability for the company in Indianapolis, Ind.

He says his company is getting a feel for where the market is and trying to anticipate where it is going.

“When you are a new carrier, you have to be disciplined from an underwriting perspective. You can’t take some of the [business] that people with a larger book can take,” he says.

Protective Specialty targets pure architects, engineers, land surveyors, interior designers, land and space planners as well as others, and looks for firms with revenue up to $15 million. Aiken says his company’s forms are somewhat manuscript because clients need different things and the carrier wants to be as flexible as possible to meet those needs.

“I don’t think we have recreated the wheel in anyway, but we are trying to focus on service and providing what the client is seeking,” he says.

Meanwhile, established players like Arrowhead and Business Risk Partners are doing what they can to remain competitive and relevant.

Arrowhead rewrote its policy last year and made a few upgrades, including:

• Defined coverage for technology exposures and Web site security
• Coverage for contractors pollution liability as it relates to professional services by the architect or engineer
• Enhanced credits for those who settle claims through mediation and incorporate risk management
• An extended reporting period option

Arrowhead has in-house authority to offer limits of up to $10 million and doesn’t exclude any classes of business, but does look for quality firms that are well-managed.

Business Risk Partners has updated its architects and engineers form and plans to re-launch it in the next month or so. Doherty says BRP will market to this class more aggressively and wants to become a bigger player than it has been previously, but she acknowledges it won’t be easy.

“Agents are getting bombarded from every angle so getting them to focus on this new form will take some time,” she says.

The coverage BRP offers is from Lloyd’s of London. Some of the enhancements include:

• Administrative proceeding coverage with $35,000 of expenses to help pay for an investigation brought by a state licensing board
• Subpoena compliance coverage with $5,000 of coverage for the legal costs to get the needed documents in order to provide to a third party
• Mediation deductible credit of 50 percent, up to $25,000, for clients who use mediation to settle a claim in the first round
• Personal injury added to standard coverage

Confidentiality coverage

Doherty says BRP has tried to make the language in the policy broad so there are no gaps in the definition of professional services.

Moonan says the biggest challenge for insurers now is rate discipline.

“There are two classes of insurers: those who have been in it a long time who have seasoned results and who know where the prices need to be; and a second class of companies trying to build market share and pricing accounts very aggressively,” he says. “You have one group holding the line and one group that is still undercutting the market by a wide margin.”