Fragmented EPL Market Continually Changing As Insurers Refine Strategies

The external factors are obvious and significant. Severe economic conditions have resulted in significant job loss, and it is not surprising that these conditions are driving employment claims. One indicator–discrimination charges reported by the U.S. Equal Employment Opportunity Commission–rose approximately 15 percent in 2008 over 2007. Additionally, insurers have indicated to us that their EPLI claim frequency started to rise in the latter half of 2008.

In addition to the economic conditions, regulatory and legal changes have made it easier to bring employment claims. This is an opportune area for plaintiffs' attorneys, and the changes have allowed them to break new legal ground. Experts in employment law suggest that claims frequency is increasing across a range of claim types. Hot areas include the following:

o Wage and hour

o Age discrimination

o Sexual harassment

o Whistleblowing and retaliation

o Wrongful termination

The EEOC charge statistics also highlight some of these hot areas, with charges based on age and retaliation seeing the largest annual increases in 2008. Age charges rose nearly 29 percent, while retaliation charges jumped 23 percent.

Much has been written about federal legislative changes, both new law and amendments to existing laws, such as the Family and Medical Leave Act, the Ledbetter Fair Pay Act and the Fair Labor Standards Act. In particular, the Ledbetter Fair Pay Act has gotten significant attention because of the removal of time limit bars for certain types of employment claims. However, a long list of legislative changes at the state level, some of which exceed the federal requirements, has worked to increase employers' liability as well.

Within the EPL insurance segment, most underwriters maintain that their EPLI business is profitable, and underwriters are unlikely to pull back or withdraw given profitable business. Currently there are numerous EPLI insurers, and new entrants continue to arrive on the scene. The combination of underwriting profitability and numerous competitors has resulted in a market with price competition, more relaxed underwriting requirements and broader coverage.

Competitive insurers are responding in the market by adding new coverages or aggressively promoting existing coverages. Some of these are critically important for certain types of customers, and others are window dressing. Examples of both include:

o Wage and hour coverage

o Third-party discrimination

o Alien investigation coverage

o Identity theft coverage

o Workplace violence counseling

For example, wage and hour coverage is now an important coverage for most insureds as a result of new legislation and increasing plaintiff's activity. Likewise, third-party coverage for discrimination is an important coverage for classes with public exposures, such as medical providers, country clubs and property managers.

Other coverages get less attention, such as alien investigation coverage, which provides assistance for investigations into illegal workers, but this may be important for some employers in specific territories and classes.

Indentify theft is a coverage enhancement that seems to attract very limited interest from most insureds.

In addition to coverage enhancements, we are seeing price competition from rate reductions and from the expansion of underwriting guidelines. Some of this activity is coming from new entrants, but most is from existing insurers being more aggressive in specific areas they are interested in targeting.

In some cases underwriters are willing to be more aggressive with terms when an account has demonstrated a serious effort at loss prevention. For example, the introduction of a more sophisticated employee handbook, the implementation of disciplined internal policies and appropriate corrective actions as a result of an incident are generally received positively by insurance underwriters.

All of this competitive activity is tempered by a business that is highly segmented. Underwriters do not use exactly the same approaches to underwriting, but most underwriters segment this line of business by some combination of account size, territory, class of business and individual operating characteristics. Of course, other factors play an important role as well.

Given the degree of competition in the market, insurers are looking for any way to gain an edge. Underwriters look at their business from different perspectives and are constantly making adjustments in their underwriting and rating based on results and assessments of new exposures.

While they want to remain as competitive as possible, insurers are diligent in adjusting their approach in, and sometimes backing away from, areas perceived as problems. For example, some territories, such as California, are universally perceived as more difficult environments, for good reason, and insurers use different tactics to write business in those territories.

And there are some classes that are either tougher to underwrite or require expanded coverage to effectively protect the insured. In this case, as well, insurers do not always use the same combination of underwriting, coverage and price to select accounts.

For example, some underwriters are paying much closer attention to the financial results of auto dealers, and are requesting historical revenues and, in some cases, financial statements. Additionally, some manufacturing accounts have requested broader coverage, but underwriters are paying close attention to the potential for significant downsizing and, in some cases, are requesting specific plans when downsizing activity is in the works.

The underlying theme is that insurers do not approach the EPLI business the same way. The segmented aspect of the EPLI market, combined with different tactics and constant refinement by insurers, means the same insurer is not always the best as client needs and characteristics change. This is the fragmentation part, and this creates opportunities for the experts in the EPLI business.

A high degree of market knowledge can go a long way toward providing the best coverage and winning the account. Since it is difficult to remain up to speed with the changing EPLI market, regular marketing to a range of EPL insurers to test market conditions on a periodic basis is the best way to stay well informed. Specialty wholesale brokers are a great resource to assist in this process.

No discussion of EPLI would be complete without a discussion about risk management. Many insurers offer well-developed risk management services at little or no cost, and the specific risk management services offered have been increased as insurers compete.

Insureds should be encouraged, particularly in this economic environment, to utilize these services. Risk management services can include telephone hotlines to counsel, documentation templates for employee handbooks, employment contracts and applications, and human resources training.

The bottom line is that risk management works in reducing employment liability. Unfortunately, the reality is that a low percentage of insureds utilize these services.

Agents and brokers can be helpful to their clients by advising clients to implement risk management techniques, by encouraging the use of risk management services offered by insurers, and by encouraging clients to be aggressive in obtaining expert employment legal counsel at appropriate times.

Robert Sargent is an executive vice president for Mercator Risk Services in Hartford, Conn. He is also the author of the Specialty Insurance blog at http://specialtyinsurance.typepad.com. He can be reached at RSargent@mercatorrisk.com.