Hard Market Spurs Frustration, Opportunity

By Susanne Sclafane

NU Online News Service, Feb. 27, 10:45 a.m. EST, San Antonio?Frustration levels--as well as errors and omissions exposures--are rising as specialty brokers and underwriters deal with the increased workloads of the hardening insurance market, but the good news is that new opportunities to do business are opening up, industry players revealed here.

Panelists examined the placement process and its challenges during a session here at the 2002 Mid-Year Marketplace & Business Roundup of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices.

Setting the stage for the discussion, David Leonard, senior vice president of Royal Specialty Underwriting in Atlanta, said his office goes through 300 submissions daily. "It's nice to have all these opportunities, but the challenge is getting to them and being responsive," he said, noting that insurers are looking for wholesalers to "qualify the risks."

Qualifying, he said, means providing complete loss information and an understanding of what the risk is, adding that wholesalers should also determine why a piece of business is coming into the wholesale market. A retailer fighting a 20 percent increase from a standard carrier is not a good reason, he said.

"Do you accept an incomplete submission as 'first in'?" a wholesale broker in the audience asked Mr. Leonard during the question-and-answer period, describing his frustration in trying to get complete information for underwriters, only to "run into the dreaded prior submission" notice, because a competitor has beat him to the underwriter's desk with an incomplete submission.

"What underwriters will do is watch for incomplete submissions that come from a particular producer over time. If we sense they're trying to block the market, then we deal with that on an individual basis," Mr. Leonard said. He added that insurers can limit the wholesalers they do business with in order to eliminate the multiple-submission issue.

"Why don't you solve this by saying we're not going to accept incomplete submissions?" the wholesaler asked.

Panelist Wiley Cooper, a wholesaler with CRC Inc. in Dallas, said that it is difficult to define completeness. For a property risk, for example, he said a completely filled-in ACORD application might give all the information necessary to model a single Florida location, but for a property with 1,000 locations, such information wouldn't be enough. For that, he said, an underwriter would likely require an e-mailed spreadsheet of data.

Maureen Caviston, president of Partners Specialty in Stamford, Conn., and the panel's moderator, said another challenge for wholesalers arises from a proliferation of nonrenewal notices that carriers send out when they lose reinsurance and have to change coverage terms.

Such notices force retailers to market the business, leaving wholesalers (whose performance is measured by carriers in terms of hit ratios) to question whether there is any real opportunity to write it.

She suggested that there might need to be some wholesaler-insurer communications on such submissions. "We're not sure if this is an opportunity yet, but we need to submit it to you so we're not sending it at the last minute. 'Sit on this and we'll let you know if it's an opportunity or not,'" she said, suggesting how a wholesaler might begin that dialogue.

"We struggle with it because we do intend to nonrenew the risk if we can't get terms and conditions changed, but by the same token, if we can get them changed, then we will stay on it," Mr. Leonard said, adding that brokers who didn't try to find another market for the business might face E&O issues.

Mr. Cooper described a different E&O situation that arises as a result of differences between "the laundry list of [coverage] extensions" that retailers request and what's actually available.

He recalled a past situation where a retailer had requested blanket limits on a renewal. Although much discussion led to an agreement on a scheduled amount instead, he said, when a loss exceeded the amount, "the insured forgot all that discussion. And the court's position was because the retailer's application requested blanket coverage?it didn't matter that we talked about it and that the carrier didn't offer it?. There was liability because we didn't get what [the retailer] asked for."

Describing the dangers inherent in not effectively communicating new restrictions, particularly on renewals with the same carrier, he said, "there are plenty of wholesale brokers who are glossing that over [and] plenty of retailers that get quotes and in their haste don't read through the terms and conditions. We try to bold it, underline it and talk about it, but it's hard to keep up with all the way around."

"It's hard for us to force someone that is interested in a good price to look at forms and to tell them to make sure to explain" them to their clients, Ms. Caviston said. "In the sales role that we're in, you don't want to be negative. If they haven't asked the question, what's our obligation?"

She also raised the question of how insurer ratings might give rise to E&O exposures. "On long-tailed business, [an insurer] could be rated ?A' when you bind, but two years later, it's out of business," she said.

"If [A.M.] Best can't do it, we're really not qualified," Mr. Cooper said, giving the general view of the panel that brokers are safe if they stick with carriers rated "A-minus" or better.

The panelists also discussed the increased E&O risks associated with a reliance on binders for policies that haven't yet been issued. "I just don't know how to fix it. I think everyone can expect their E&O deductibles to increase," Mr. Leonard said, noting the staffing issues are creating the delays in policy issuance.

Ms. Caviston pointed out that during the last hard market, NAPSLO looked into the possibility of creating a captive to offer broker E&O coverage because of a lack of capacity. "We're not there today, but it may not be far away," she said.

Mr. Cooper suggested that NAPSLO could be a source of additional limits of coverage, noting that most brokers carry "the same limits they've been carrying forever." Even if they doubled them in the last 10 years, "the cost of claims and sizes of accounts we're handling are way past that," he said.

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Hard Market Spurs Frustration, Opportunity

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