Buyers Still Hungry For EPLI

Now, "we sell so many," he said, echoing the comments that EPL insurers made last year to NU, when they reported double-digit submissions for the first time. Mr. Taffae said e-perils.com sells about five EPL policies every week.

"It's become a mandatory coverage just like the CGL. Ten years ago, no one would have thought this. But you can't be in business in corporate America–I don't care what state you are in–without EPLI," he said.

Letha Heaton, vice president of sales and marketing for Shand Morahan & Company in Deerfield, Ill., agreed. She said that based on market research her company did with current policyholders, "our indication is that 90 percent-plus of them see this is as a critical coverage–one that they have to have."

But when Shand did that same research with people who had not purchased EPLI before, "the numbers went down dramatically," she reported.

"Generally, if somebody gets one claim and goes through the process of spending $47,000 to defend themselves, regardless of whether they did anything wrong, they recognize that a policy for $3,500-$7,500 was probably a more prudent approach," she said. (Shands largest production category is companies with between five and 70 employees.)

Going from research to reality, she said that after "doubling business every year for five straight years," the company has seen its growth rate flatten to around 20 percent. But new business has continued to grow and renewal rates are steady, she noted.

With the turn in the economy and businesses facing bankruptcy, she said that there will be a natural decline in people requiring coverage.

Michael Maloney, vice president and EPLI manager for Chubb Specialty Insurance in Simsbury, Conn., said that current insureds still recognize their exposures, but that some are now "looking at what theyre willing to keep."

"Some buyers are looking at alternatives–funding mechanisms, maybe using captives or finite-risk programs that may require going offshore," he said, suggesting that this was the case especially for some of the largest clients.

"It strikes me that as I read the papers lately, more and more big companies are getting sued regularly, [and] in the last year, a lot of big-name companies have been in the market seeking insurance protection [for the first time]. So we certainly are getting many more requests to buy the coverage–or to consider proposals from us" from large prospective buyers, he said.

"Lately, not that many of them want to take the terms that [Chubb is] willing to put out," he admitted. "Im not sure that our competitors would have the exact same story," he said, noting that Chubbs 10 years of experience in the market puts it at a different point in the life cycle of the coverage.

"Theres not a uniform view of where [this market] is," and of where rates and deductibles need to be, he said, "mainly because not everyone has the same maturity and development of their book."

On the other end of the potential buyer spectrum, Mr. Maloney said that there are also a lot of 1,000-5,000 employee companies looking for EPL coverage. But for middle-market and smaller companies, he said, brokers still face the task of educating customers about their potential liability. "This year may be a challenging year for them to consider a new coverage, because they are seeing increases on their property and casualty renewals," he added.

On the carrier side of the equation, Mr. Taffae said, "what's becoming clearer every day is that they are going one way or the other. They're going for the big head count or the small employee count deals."

Some carriers think there is a big universe of smaller companies that dont face class-action exposures that they can make a lot of money on. "More and more companies, though, are saying, we only want to cover the catastrophic risks," he said. "There are probably more markets that are willing to look at an account with over 500 employees than they are smaller ones."

Other factors that carriers consider are industry and geography, he said. "The more vanilla the account, the better," he said, noting that manufacturing, for example, is a more desirable class.

"Certainly, in California, Texas, Florida and New York, there are more plaintiffs attorneys and there's more frequency of claims. So everybody takes that into consideration," he added.

Industry considerations, he said, can include the economic success of the industry overall. For example, "if you were an airline coming up for a renewal in October, underwriters would be very worried because of the downsizing," he said, noting that similar issues face the technology and retail sectors. Other sectors, like professional services and entertainment risks "have always been tough" to place, he said.

Mr. Taffae said that carriers are making a distinction between public and private companies, "to some extent, but not greatly." He did note, however, that public companies carry with them their own unique set of claims involving stock options. "We see a lot of claims with allegations that individuals were terminated before they were vested, and they allege that that was part of the decision-making process," he said.

Mr. Maloney said that private companies are Chubbs "biggest target for opportunity." To attract those potential buyers, Chubb introduced a new "modular" policy last year.

Marketed as the "Forefront Portfolio" for sales through retail agents, and "PowerSource," for sales through wholesalers, the product allows insureds to choose from a suite of eight coverages, including EPL, D&O and fiduciary liability that can be packaged in one policy. (Other options are professional liability, Internet liability, employee theft, kidnap and ransom, and workplace violence.)

Although some EPL insurers have been talking about the potential of the "untapped" privately-held and not-for-profit company markets for years, Ms. Longmore said that while regional privately-held firms are still attractive for insurers, not-for-profits–particularly in health care–are another story.

Noting that not-for-profits typically buy packaged policies combining EPL and D&O, she said the claims for healthcare institutions are largely EPL claims that are having a disproportionate impact on renewal premiums. Carriers are also looking at coinsurance for those institutions, she said, noting that theyll face the triple impact of a doubling of retention, 10-20 percent coinsurance, and then a 30-40 percent rate increase.

Reacting to the changes, she suggests that some clients pull the EPL out and buy standalone coverage, rather than reducing the limits of the otherwise unaffordable combined programs.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 20, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.