Hard Market Extends To Agent E&O

If it continues, he cautions, some agents could take the risk of doing without. And it is a risk, he cautions, they really dont want to take.

Curtis M. Pearsall, vice president of E&O for the Utica Mutual Insurance Company based in Utica, N.Y., has been involved in writing E&O for agents since 1988. His company underwrites many plans for state Professional Insurance Agent of America associations, and he says, since the end of the soft market, things have changed drastically.

When he began, there were five or six underwriters taking on this risk. During the soft market of the 1990s, the number exploded to 30. Now, it has dropped back down to the 1980 level, he said.

"I would characterize this as a very tight market for agents E&O," Mr. Pearsall said.

The tightness, Mr. Pearsall continued, is affecting agents with claims activity, who are trying to get renewals on their policies or trying to finding new underwriters to take on the risk.

Also, start-up agencies are having a very difficult time finding coverage, because the underwriters are being very selective in the risks they are willing to take, he said.

"We are going to get close to 5,000 new business applications in the door, which is an all-time record," he said. "We are looking at the best opportunities, looking at rate, which will mean sustainable, profitable growth for us," Mr. Pearsall added.

The exodus of carriers from this market is not based on some whimsical desire to seek other lines of business, but on real concerns that the hard property-casualty market across all lines could increase the number of claims against agents, explain the executives.

The reason standard carriers are moving away from this market is because the possibility of an agent making a mistake in increasing, reasoned Betsy Barnette, director, professional liability for CRC Insurance Services Inc., a wholesaler based in Birmingham, Ala., and a subsidiary of BB&T headquartered in Winston-Salem, N.C.

She explained that the thinking is that as all lines become tougher to place, carriers are placing more restrictions on coverage, which can be missed by the agent.

"They either wont catch it, which can be devastating, or they dont understand the significance of it, or they wont explain it so their client understands the significance of it," Ms. Barnette pointed out. She added that in many situations giving rise to claims, clients say that if they had understood the restrictions, they never would have purchased the policies.

Another driver of the exodus, underwriters are telling her, is that claims are increasing in severity.

Mr. Pearsall said that severity is also driving price increases as underwriters seek profitability. The number of claims Utica has seen is the lowest it has ever experienced, he said, but the cost of legal defense and the severity of the claims have taken a toll. In the past year, he noted, the company had two claims alone for over $2 million each.

"Both were bond-related claims and we ended up taking a tougher position on agencies handling the bond business," Mr. Pearsall added.

The claims situation for agents, Ms. Barnette observed, also means "changes in the product."

"There are some things you just cant buy or its limited to small niche markets," she said. For example, underwriters are not covering insolvency, she observed, referring to the risk of an agent placing business with an insurance company that ultimately becomes insolvent. Professional liability underwriters feel that the agents choice of carrier should be considered a business risk and "not an insured peril," she explained.

Agents with significant past claims who are facing non-renewals are going into the marketplace and purchasing insurance with record-date rescission, meaning that the new insurer is not going to be responsible for any E&O coverage prior to the date of the new insurance policy, she said. That forces the agent to purchase the tail from their prior carrier, potentially placing "a bad aura" on the account as the agent shops around in the future, Ms. Barnette said.

Limits are also in decline and agents are being forced to take on higher retentions. At Utica, limits are still available up to $20 million, Mr. Pearsall said, but Ms. Barnette noted that in her dealings, higher limits are becoming increasingly hard to get.

Generally, agents have been hit with price increases of between 10-to-40 percent, based on their experience and the state they are in, said Mr. Pearsall of Uticas clients. And he added, the pace will probably continue through 2003.

Ms. Barnette noted that in her experience pricing has risen anywhere between 15-to-100 percent.

Agents who are members of the Independent Insurance Agents & Brokers of America, based in Alexandria, Va., are getting a little bit of help through the for-profit Big "I" Membership Services program.

David Hulcher, director of E&O operations, said the program is working with a group of wholesalers to find coverage for all members, including those with losses.

"We are looking to meet all of our members needs and have alternative markets when they cannot find traditional markets to fit into," Mr. Hulcher explained.

He said one advantage of the IIABAs program is that while there have been substantial rate increases, the program, underwritten by Westport Insurance Corp. of Overland Park, Kan., because of its broad base, has been able to smooth out the effect. "So one state does not see it all."

There has been a "substantial increase" in the number of agents coming to the association looking for E&O coverage, but the situation has not hit the critical point where agents are closing up shop because they cannot get coverage.

"Who we are trying to cover is the agent who makes responsible decisions," Mr. Hulcher said.

Mr. Pearsall sounded a cautionary note on this point, suggesting that some agents experiencing problems with their renewals might be "going bare," which he added, "is a dangerous position to be in."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 11, 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.