Product Liability insurance market conditions are softening forthe first time in several years for a significant segment ofinsurance buyers, insurers and brokers say. Some risks, however,continue to face relatively steep rate hikes and insufficientcapacity.

Product Liability risks face a more challenging market if theydo not have a robust loss prevention structure in place and have acheckered loss history, according to Daniel E. Aronson, a NewYork-based managing director and the U.S. primary casualtyplacement leader at Marsh USA. “It's a smaller marketplace forthose risks. Others are more competitive.”

Every account, however, faces more rigorous underwriting, marketexecutives concur.

Softening Rates, Deeper Underwriting

After years of significant rate increases, which spiked intodouble digits for some classes of business, rates have stabilized,according to market executives. “The majority of risks can expectpretty favorable renewals,” Aronson says.

Rates should be flat to no more than a couple of percentagepoints higher for most buyers. Insurers even are imposing lowerrate increases on policyholders with significant Product Liabilityrisks, notes one executive who did not want to be identified.

In addition, “there definitely is a lot of interest in newbusiness” when a Product Liability account has a clean loss recordand strong loss-prevention controls in place, Aronson says.

Problematic accounts, however, should expect significant rateincreases, although “we have probably seen the highest increasesalready” of double digits, Aronson says. Those risks shouldanticipate high single-digit rate hikes, he says.

But no matter how attractive an account, insurers will beunderwriting it more closely, market executives say.

Underwriters are looking at buyers' controls, contracts andclaims management practices, explains Jeff Mazie, a LosAngeles-based senior vice president and unit manager for TheLockton Cos. “I think [underwriter scrutiny] is a little deeper,not necessarily tougher,” to understand the risk better, heobserves.

That, in turn, leads to more purchase options for the buyer,depending on its cash flow and loss-mitigation strategy, Maziesays. For example, an account might be willing to pay a higherpremium for greater coverage when assuming a low retention andsecuring coverage of defense costs. Or the account might want toreduce its costs by taking a high retention and foregoing coveragefor defense costs.

“None of this is new, but everyone is looking at it more than inthe past,” Mazie says.

Capacity

The softer rates in Product Liability result from factors beyondbrokers pressing for better deals, according to market executives.Contributing to the factors is the market's achievement of rateadequacy.

“Product Liability insurers are saying they have a good ratenow,” says Lorraine Seib, the New York-based president of excesscasualty at XL Group.

Another factor spurring completion is an abundance of capacityfor good risks, Mazie says. “There's too much capacity in themarketplace,” Seib agrees, while also noting that XL insuresFortune as well as small companies that manufacture a wide varietyof products.

A big company with significant risk, but good claims experience,could buy $1 billion or more of limits. But for insurance buyerswith dicey risk, that capacity typically is split among onshore andoffshore underwriters. Onshore insurers have tighter policy formsand typically do not offer significant limits to companies withhigh-hazard risks, while offshore insurers specialize in thatbusiness, Seib notes.

Pamela F. Ferrandino, New York-based national casualty practiceleader, placement, at Willis North America, estimates that themarket has sufficient capacity for 60%-80% of buyers.

But for the largest accounts, the available limits of $500million to $1 billion are not “sufficiently meaningful.”

Coverage Developments

If a cyber attack causes a client's product to malfunction, thenpolicyholders want the resulting bodily injury or property damagelosses covered, Seib says.

But despite softening market conditions, insurers—as they are inother lines of coverage—are beginning to add exclusions designed tobar coverage for losses related to cyber risk, Seib notes.

“So, it's evolving,” she says. “It's something that clientshould be thinking about with their brokers—the wording that shouldbe included in their Product Liability policy.”

Meanwhile, Mazie says he is seeing a growing number of clientsdusting off and using an established Product Liability product aspart of their mergers and acquisitions. The acquiring party wantsthe seller to purchase a discontinued-product policy that shieldsthe buyer from liability if a claim were filed over anout-of-production item after the merger or acquisition has beencompleted.

The policies usually provide limits of $25 million to $50million and years of protection to whichever party in the M&Atransaction or that has agreed to retain liability for thediscontinued product.