Tri-furcated Soft Market Seen For EPLI

Going forward, then, "brokers may have a more difficult time figuring out markets' appetites, because each market is going to be spending some time trying to guess what its appetite is," Mr. Robin said, noting that he's already witnessing changes.

"I think the auto industry is probably the best example, where you already had a class of business that wasn't the most attractive. So from an E&S point of view, it was an opportunity class, because the admitted carriers weren't writing auto dealers' EPL," he said. "But now, rather than being able to get your pound of flesh for an auto dealer, even the E&S markets are avoiding them because we just know something is coming down the pike."

Carriers interviewed for this report, however, generally said their appetites with respect to at-risk industry classes remain unchanged in 2009.

At Zurich North America, for example, it's business as usual for Ray Carpenter, vice president for bond/D&O in the commercial markets division, who spoke about both EPLI and fiduciary insurance for one of the industry segments that's under the greatest financial stress–financial institutions.

"Our offering to our customers has remained consistent. The one component that has changed actually is the focus into underwriting, the degree of underwriting–looking a little bit deeper," said Mr. Carpenter, who also said Zurich's appetite includes financial firms of all types and sizes. Giving an example of the firm's more intensive underwriting, he said, on the fiduciary side, this might include a deeper dive into asset values and the types of investments included in pension plans.

For both EPL and fiduciary liability policies, he said, "we look at every risk on an individual basis and on its own merits [to] make a determination one way or another with regard to acceptability."

While only one carrier executive–Cathy Padalino, vice president and EPL product manager for Chubb & Son–reported evidence of higher prices for EPLI buyers generally, Mr. Carpenter noted the fact many financial institutions buy EPLI and fiduciary as part of an overall offering with directors and officers insurance spells higher insurance costs for these particular customers. "All the scenarios that are driving rates on the D&O side also come to bear on these two lines," he said, declining to pinpoint whether hikes might be single- or double-digits.

At Chubb, where the insurer's risk appetite encompasses a broad range of industries outside of municipalities and public entities, Ms. Padalino said that "from an industry standpoint, we're not seeing decreases across the board anymore."

"Some of the very best customers would get flat, but we are definitely seeing rate increases…due to heightened exposure factors" related to the economy, a changing legal landscape and an increase in the number of claims, she said.

"Absolutely, fear of frequency right now is a trend," said Phil Norton, vice chair for the Midwest region of A.J. Gallagher & Company in Chicago, noting that the trend is driving changes in deductibles rather than higher prices. "If you get a client with 12 $300,000 claims, then whether the deductible is $50,000 or $200,000 is a huge huge difference."

He went on to describe what he sees as a "tri-furcated market" in this renewal season, describing conditions for three sets of accounts: small clients (with between 250 and 500 employees) medium-sized (up to 10,000 employees) and larger ones.

Mr. Norton said small accounts are very competitive, often getting renewal decreases and no change in deductible. In the middle market, prices are flat or occasionally down with some deductible movements, but not always. For this client size, "it's more of a correction to the [prior] deductible than a trend," he said. "Depending on who your carrier is, you may be able to get away with no change in deductible and a small premium decrease."

The large accounts where carriers have seen some claims activity are the ones they're pushing the hardest on for deductible changes. "What's interesting, at least on my accounts, is we're still not getting premium increases on the large accounts," he said. "What's happening is [carriers] are coming and negotiating with much less competition."

With fewer carriers interested in these large accounts, the broker said he is seeing mostly flat renewals or very small decreases in premium together with increased deductibles. "If I'm the carrier, I can control a frequency problem with the deductible. As long as the severities remain constant, there's no need to get additional premium."

Carrie Brodzinski, EPL product manager for Beazley Group in Farmington, Conn., said the EPL market is "not necessarily hardening," but market participants are "in synch on asking the right questions."

Up until a few months ago, she said, "if you were sticking to your guns and asking a lot of underwriting questions, there were a lot of carriers who weren't." Now she believes "there's a lot more commonality" with insurers looking at financial statements and asking whether a company had a layoff and, if so, how the layoff is being handled.

Both Ms. Brodzinski and Ms. Padalino said a few carriers are taking matters a step further when is comes to layoffs, by putting downsizing exclusions on EPL policies.

"Depending on what's going on at the employer, you can say I'm just not going to write a layoff. You can add a downsizing exclusion and say I'll cover you, but not [for] that. You can have a separate retention for downsizing," Ms. Brodzinski said. "Those things are going on."

Giving a broker's view, Mr. Robin said there may be exclusions coming on for individual risks, but he believes it is unlikely that carriers will redraft core policy wording to exclude downsizing across the board.

"One of the issues for carriers is the broker market," he said. "The core policy is what [brokers] look at to see if a market meets their checklists." If the brokers know a carrier is going to exclude downsizing "no matter what," then that's not going to be an attractive insurance company market.

Ms. Padalino said she's aware of at least one carrier in the small private commercial space that attached a downsizing exclusion to its policy. "Unequivocally that is not something we are looking to do," she added, noting that Chubb believes "this is the time to encourage employers to buy EPL insurance, for us to partner with them."

For example, the carrier is providing incentives for reporting Equal Employment Opportunity Commission charges early, she said, referring to a policy endorsement that provides customers that notify Chubb within 15 days of a charge with a 10 percent decrease in their deductibles.

Partnering with an employer early in the life of a claim can prevent it from blowing up into a huge lawsuit, Ms. Padalino said.

Liberty Insurance Underwriters is also focused on partnering with insureds–with a service offering directly tied to layoff issues, according to Melissa Mattioli, vice president and EPL product manager.

Last month, LIU teamed up with law firm Jackson Lewis to launch a layoff assistance program, she said, noting that each of LIU's EPL insureds can now go to the lawyers for help with the layoff process "from the beginning to the end."

For example, she said the law firm will guide employers in determining whether they need to do layoffs to cut costs in the first place, and then to figure out how many positions need to be cut. The firm will also assist with severance packages and preparing analyses to see if there's any disparate impact to classes of employees protected under employment statutes from the layoff.

This latest service offering is part of an evolution of loss prevention services that carriers began providing to employers for free in the 1990s. Jack McCalmon, founder of The McCalmon Group–which works with many mainstream carriers to create loss prevention tools, such as Web-based training, model employee handbooks and employment policies–said usage of such tools is at record levels.

Budget cuts are the reason, said Mr. McCalmon, who is also a partner with the law firm of Titus, Hillis, Reynolds, Love, Dickman & McCalmon, PLC in Tulsa, Okla. Even large, healthy organizations are cutting costs, and the first areas to get slashed are often education and training, he said, noting that employers now recognize the value of free training resources tied to EPL policies.

Like LIU, Beazley has a service feature on its EPL policy that may prove to be particularly valuable for companies that have to cope with large downsizings, according to Ms. Brodzinski, who described "crisis management fund-type coverage."

The policy, called employment event coverage, was introduced in 2008 to give insureds a sublimit ($5,000 per million of policy limit) for public relations and other costs incurred to handle a major employment event, she said.

In addition to services, LIU was the first insurer to offer defense cost coverage for WARN violations, according to Ms. Mattioli, who explained that the Workers Adjustment Retraining and Notification Act requires employers to notify employees of intended layoffs in advance–usually 60 days (but rules vary, she said, noting that it's 90 days in New York, effective Jan. 1, 2009).

As EPL carriers continue to unveil services and coverage nuances to differentiate themselves, NAS is helping standard commercial carriers distinguish themselves by adding EPL coverage to their businessowners packages.

"They've probably ground down to knuckle on price at this point. So in order to sell more, they have to show some distinction," said Mr. Robin, explaining that NAS's carrier partners provide the coverage in the form of tailored reinsurance products.

In addition to standard insurers, NAS also provides the coverage to MGAs who write affinity program business.