Professional Liability Market Perspective: Post-September 2001
(County Bar Update, December 2001, Vol. 21, No. 11)

 

Professional Liability Market Perspective:
Post-September 2001

Over the past few months the insurance industry had prepared for the beginnings of a hard market. It now seems clear that the events of September 11, 2001 will serve to precipitate and may potentially intensify what had already begun.

By the middle of this past summer, the insurance market for professional liability insurance had shifted with regard to rate reductions and expansion in coverage. The majority of insurers were no longer prepared to provide either of these as inducements to insurance purchasers. In many cases, purchasers were faced with rate increases that ranged from 7% to as high as 30%, particularly where loss history was a major underwriting factor. Nonetheless, insurance capacity was still plentiful, many placements were oversubscribed, coverage was broad and there was very little pressure on firms to increase the amount of self insurance that policyholders bear within the deductible level. In fact, a few insurers continued to aggressively compete on price in jurisdictions where they sought market share.

The above-described environment existed as a result of surplus underwriting capacity; moreover, since premiums lagged below the levels that actuaries had predicted for law firm professional liability rates, the situation was known to be temporary. In the first quarter of 2001, some actuaries were predicting that insurers would need to increase rates by as much as 40%-50% to redress the underpricing of insurance that had taken place over the past decade. Returns on investments also had started to dwindle with stock prices continuing to plummet. Nearer the end of the summer, it became clear that the insurance industry was feeling the lack of its former levels of surplus capacity. This was evidenced by the announcements of a growing number of carriers that they had decided to quit the business altogether or limit underwriting activities. Well over a dozen underwriters either fully or partially retreated from lawyers professional liability insurance. Importantly, all of these occurrences happened priorto the events of September 11, 2001. It is therefore necessary to consider the implications of those events in terms of the financial costs to the insurance industry and the effect that it will have on insurance buyers. To quote Morgan Stanley, "The World Trade Center attack is unquestionably the most significant event in the history of the insurance industry."1

To put the estimated losses from the World Trade Center attacks into some context, the current estimates from property loss due to the events of September 11 range from a low of $20 billion to a high of $72 billion.2 The latter number is five times greater than the amount paid as a result of Hurricane Andrew in 1992.3 The vast number and types of insurance and reinsurance policies that will be triggered by World Trade Center related claims makes it difficult to precisely estimate total losses. A short list of these types of policies includes: aviation policies (hull and liability), property (buildings and contents), business interruption, life, accident, workers' compensation, directors and officers, travel and reinsurance of all types. As one small example of the magnitude of the loss, a senior underwriter at a major carrier predicts that the average business interruption loss for the law firms that were housed in the World Trade Center will range between $30-$40 million.

Based on early estimates, the losses might reduce the industry surplus by 10% and perhaps as much as 20%.4 There is no doubt that this will result in a hard market that could endure for 2 to 3 years or longer. Generally, hard markets result in some, or all, of the following:

  • Rates will increase 
  • Available limits will be reduced 
  • Buyers will not have multiple offers to consider 
  • Coverage will be restricted 
  • Carriers will push for increased deductibles

Carrier security is a significant issue for insurance buyers in a hard market. Thus far, rating changes or the placing of a company on "credit watch" have been announced for approximately 15 insurance companies.5

While losses will be concentrated in insurers that specialized in aviation, life, reinsurance and catastrophe property treaty, it remains important for brokers to monitor rating agency reports and to take an active role in hedging risk. Insurance purchasers need to have confidence in their broker's ability to successfully advise them and need to satisfy themselves that they have selected the best prepared broker to represent their interests. Brokers, in turn, need to keep their clients advised of important market occurrences.

As a general guideline, insurance purchasers should:

1. Provide underwriting information (applications, etc.) to your broker as soon as possible.It is extremely important that timely and complete information is provided well in advance of the expiration of current insurance coverage. It is unlikely that carriers will offer quotes before 30 days prior to renewal, since, in a hard market, carriers like to ensure that their rates reflect the most current information available to them. Nonetheless, early provision of information will allow your broker to have everything in place in order that your firm has the best options without being restricted by timing constraints.

2. Discuss your concerns with a knowledgeable, experienced broker. With respect to price increases, develop realistic expectations through discussion with your broker.

3. Be prepared to consider, with your broker, options that will affect the cost of insurance.

  • Higher deductibles 
  • Lower limits 
  • Restricted coverage: consider whether certain "optional" features are necessary for your firm, e.g. first dollar defense, career coverage, etc. 
  • Look at the long term. For example, tail coverage is very important in a hard market. The cost of the tail is one issue, but the most important factor is the duration. 
  • Restructure layers -- diversification to hedge against risk may be advisable. Spreading the risk among many carriers is still the best protection to ensure available limits and reasonable pricing and to reduce the financial risk of an insolvent carrier. Diversification of placements can be achieved by buying subscription policy placements and/or layered placements. 

1 Morgan Stanley-Equity Research North America, Insurance-Property-Casualty "World Trade Center Special Issue", September 17, 2001.

Id. at p. 3, and UBS Warburg, Global Credit Comment, Insurance Update World Trade Center Disaster,September 17, 2001. See also, Alan Cowell and Joseph Treaster, The Insurers, New Forecasts of Total Losses Rise Steeply, September 20, 2001 (citing insurance consulting firm Milliman which puts the final tally at $72 billion).

3 Cowell and Treaster, supra.

4 UBS Warburg, supra.

5 See e.g. Business Insurance, September 21, 2001 (discussing various carrier downgrades by S&P), Irish Times, September 21, 2001 (discussing downgrades by S&P), Business Wire, September 20, 2001 (various articles announcing S&P carrier downgrades).

 

This article is reproduced with the permission of Aon Direct Insurance Administrators & Affinity Insurance Services. Aon Direct Insurance Administrators & Affinity Insurance Services are members of Aon Corporation. All rights reserved.

Aon Direct Insurance Administrators has continuously served as the broker/administrator for the Los Angeles County Bar Association sponsored Attorneys' Advantage professional liability program since 1986.

Aon Direct Insurance Administrators & Affinity Insurance Services resources enable them to fully monitor the market. They gather intelligence concerning carriers and markets through a number of means, including: rating agency reports, news articles, trade journal reports and less formal intelligence gathered from being active market participants, worldwide. Having this information, and the skills to analyze it, enables Aon Direct Insurance Administrators & Affinity Insurance Services to knowledgeably advise law firms about insurance options.
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