Professional liability insurance is a vibrant,interesting, and growing segment of the property-casualty insurancemarket. If membership growth of the Professional LiabilityUnderwriting Society (PLUS) is any indication, the market hasexploded in the last 20 years. PLUS membership, which numberedroughly 1,000 in 1993, is now close to 7,000. According to SNLFinancial LLC, medical malpractice and D&O total premiumsapproach $16 billion, excluding other professional liability linessuch as employment practices, non-medical E&O (including cyberliability), and fiduciary liability. Almost one-fourth of PLUSmembers are agents and brokers, most of whom are heavily involvedin the professional liability arena.

Directors and Officers (D&O)

Kevin Ishizu, senior vice president and national practiceleader, public D&O insurance for Wells Fargo InsuranceServices, oversees a portfolio of clients ranging from IPOs toFortune 500 companies. He said public company D&O insurancecontinues to be a “buyer's market,” due to relatively lowsecurities class action frequency, a high rate of dismissals and anabundance of capacity.

Strong carriers dominate the market, and although premiumincreases in the low single digits are the norm, the price permillion in coverage remains low when compared to historic pricingindices, he said. Additionally, the price increases on the primarylayers do not necessarily carry through to the excess and Side ADIC layers. “There appears to be a continuing theme of'first-to-file' derivative litigation and merger objection cases,but the market appears to have addressed these exposures withincreased retentions in lieu of imposing meaningful premiumincreases,” he said.

On the other hand, premiums for IPOs are firming. “Historically,the risk of a securities class action on IPOs has beensubstantially higher compared with their publicly traded peers, andnow the Jumpstart Our Business Startups (JOBS) Act has been labeledas the catalyst for a more scrutinizing market,” he said. “Brokerswith the most success are well-versed in the JOBS Act and can guidetheir clients through the changes in the underwriting process thathave developed since the Act became effective.”

Brokers and carriers should be prepared to discuss potentialstrategies and possible usage of “pre-deal” and “test-the-waters”presentations. Carriers also should be prepared to discuss internalcontrols in more depth, as several carriers have cited concern withthe JOBS Act provision that substantially pushes back SOX 404auditor testing of internal controls.

D&O for private and non-profit companies is another marketentirely, according to Stephen Hunziker and Dennis Donovan, bothexecutive vice presidents for RT ProExec.

Related: Read “ProfessionalLiability Trends“

This market is in a transitional period, with long-term playersseeing profit erosion by increased claims activity increasing bothpremiums and retentions. This is opening the door for the nextgeneration of players, creating an abundance of capital. Typicalrenewal premiums are seeing increases as high as 30 percent, alongwith increased retentions. However, for “clean” accounts, plenty ofcarriers are willing to jump in at terms and conditions on par withthe expiring coverage.

D&O policies have evolved into such broad insurancecontracts that claims can emerge from a spectrum of possiblescenarios, Hunziker said. “D&O carriers have been confronted bytypes of claims that they never envisioned,” he said. “D&Oexposures have always been financially oriented, and the rippleeffect of the recession is still being felt in D&O claimdepartments.”

As a result, carriers are reevaluating their intended scope ofcoverage and how to properly price for the risk. This includesrefining underwriting guidelines, coverage wordings, and rates. Forexample, some carriers have exited sectors like car dealerships,hospitality and other service industries. Many have attempted topare back or eliminate coverage for wage-and-hour claims.Underwriters have refocused on the financial health of theirinsureds, leading to more declinations and non-renewals, or theimpositions of bankruptcy exclusions.

Medical Professional Liability

This marketplace continues to be profitable for mostunderwriters, with an industry combined ratio under 100 since 2006,said Philip Reischman, executive vice president and managingdirector of Alliant Insurance Services. Most healthcareorganizations have multiple options on renewal, with both rate andpremium reductions. Key drivers of this competitive environmentare:

• Favorable frequency and severity trends: Claimsfrequency is flat, due to patient safety and quality initiatives.Severity is trending up, but at a lower and predictable rate,allowing insurers to fine tune rate models.

• Consolidation of healthcare organizations:Driven by healthcare reform, hospitals are merging and acquiringphysician practices, medical groups are combining to bulk up insize, and the growth of accountable care organizations (ACOs—groupsof doctors, hospitals and healthcare providers) allows risksharing. The result is fewer potential clients with higher levelsof self-insurance, leaving fewer opportunities for the commercialinsurance market.

This combination of profitability and a shrinking client basehas attracted new entrants and caused long-time players to expandtheir underwriting appetites, in spite of concerns about the impactof healthcare reform, Reischman said. These trends also are evidentin the reinsurance market for medical professional liabilityinsurers, which are consolidating and taking higher retentions.

“In short, it remains a buyer's market for medical malpracticecoverage and the cost pressures faced by healthcare organizationswill tempt most insureds to consider alternatives, despite a desireto remain loyal to long-term risk-financing partners,” he said.

Related: Read “HighRisk, High Reward“

Employment Practices Liability

EPL, which didn't exist 20 years ago, is now an integral part ofany company's risk management program. The EPLI marketplacecontinues to evolve and change, having grown from only a handful ofcarriers to more than 50 insurers offering the coverage, saidDebbie Hughes, vice president and EPL producer leader for WellsFargo Insurance Services. However, in spite of abundant capacityand competition, the market is tightening, driven by continuedeconomic uncertainty, a historically high number of charges filedwith the Equal Employment Opportunity Commission (EEOC), broadenedprotected class status, and an increase in covered EPL claims, andtheir related legal costs.

Protected classes were broadened with the revision of theAmericans with Disabilities Act in 2010, yielding more EPLI claimsbased upon discrimination, harassment and termination, Hughes said.The EEOC is focusing on new initiatives, so future claims willarise from a variety of sources, including the Genetic InformationNondiscrimination Act of 2008, ADEA Reasonable Factors Other thanAGE, Transgender EEOC Commission Opinion (2012) and backgroundchecks. “We expect continued legislation and administrative rulingsthat will expand the ability of employees to bring action againsttheir employers,” she said.

Claimants filed almost 100,000 charges with the EEOC in 2012with retaliation, race and sex discrimination charges the mostfrequent allegations, Hughes said. In 2012 alone, the EEOCrecovered $365.4 million. Fair Labor Standard Act (FLSA) litigationcontinues to be problematic for many organizations. Carrierstypically do not cover these types of claims, although a handfulprovide sublimits for defense costs only. Some Bermuda markets willprovide stand-alone FLSA policies, but only with high retentionsand premiums high.

Social media and the Internet also create exposures foremployers, Hughes said. Although employers have the right tomonitor employee usage of computer or email systems, there is stilla right-to-privacy issue that arises from these actions. To protectthemselves, employers should implement a clear written policy oncomputer usage; update policies and procedures that reserve theright to access and use employee electronic information on employerequipment, and ensure compliance with state and local laws.Employers also must keep current on how the courts interpretprivacy laws in the workplace, Hughes said.

Cyber Liability

As targeted network attacks increase and the privacy and datasecurity environment is increasingly regulated, more companies willseek to transfer the risk to an insurance product, fuelingcompetition among carriers, said Meredith Schnur, senior vicepresident of professional risk at Wells Fargo InsuranceServices.

Although both capacity and demand are at an all-time high,underwriters are learning to better evaluate these risks. Althoughthe U.S. leads the world in regulating privacy risk, Schnur expectsto see increased regulation in the European Union, Canada and theAsia Pacific region, an evolution that may present challenges formultinational organizations.

Related: Read “SmallBusiness, Interrupted“

More than 30 carriers now offer network and privacy insuranceproducts, compared with five carriers 10 years ago, Schnur said.Some may exit the market if their limited books see significantlosses, or if plaintiffs are successful in moving class actions totrial. Current total market capacity is estimated at more than $450million, including $300 million for third-party liabilitycoverage—legal costs and damages and roughly $150 million forfirst-party coverages like business interruption and data assetloss.

As carriers assess the rapidly evolving risk environment, theycontinue to monitor the frequency and severity of breach events.Claims frequency is increasing from the theft or loss of portabledevices, some of which contain unencrypted data, creating privacyconcerns and triggering certain duties mandated in the event of aprivacy breach, Schnur said. Fines and penalties also can beassessed against the company arising out of such events. On theseverity side, Schnur sees an increase in targeted attacks that useweapons such as complex malware and advanced persistence threats(APTs). These highly sophisticated attacks usually cause bothnetwork and privacy risk concerns. Short-term harm to reputation isof even greater concern since these types of events are oftenpublicized in the media.

The industries that are most interested in purchasing networksecurity and privacy liability insurance are healthcare,hospitality, retail, financial, and others that are highlyregulated or work with large volumes of personally identifiableinformation. Government contractors, law firms and otherorganizations that perform highly confidential work are preparingfor the next wave of attacks. Many written contracts requireservice providers to obtain coverage not only for professionaland/or technology E&O, but also for network security andprivacy liability, Schnur said.

Given the record number of carriers jumping into this hotmarket, it is extremely important to choose a carrier that has boththe commitment and the expertise to handle complex claim situationsin network risk and privacy liability.

The Market in General

What does all this mean for independent agents and brokers?Chris Christian, CIC, RPLU, vice president/senior broker with U.S.Risk, sees a “ripple effect” in the professional liability servicesagents and brokers provide when insureds excessively shop forterms. “It starts with the insureds, or with panicked agents, andit's causing what could become an insurmountable obstacle regardinghow our industry handles volume,” she said. “Insureds are puttingtremendous pressure on their agents, and agents are taking adefensive position in anticipation of competition. As a result,instead of shopping the market thoroughly every 3 years or so,they're taking risks to market every year, and looking for multiplequotes annually.”

Although this would appear to be a good thing for the insureds,it actually results “underwriter burnout,” in which underwritersrefuse to quote an overexposed submission.

“It takes great deal of restraint, ongoing education, and a lotof trust between the insured and agent, or the agent andwholesaler, to avoid falling into this trap,” she said.

The other problem this phenomenon causes is on the carrier side:a lack of staff to deal with all those submissions. “Carrierscannot possibly staff up for submission flow they are seeing. Theycan only staff up for top line or bottom line growth,” she said.Underwriters that were handling 25 submissions a week are nowseeing 100, which means many submissions will be ignored.