Professional liability insurers are becoming increasingly able to separate the wheat from the chaff in terms of what risks they will cover, creating a relatively stable environment for much of the market.

Although the consensus is that any overall changes to the market will be gradual, there is some variance in opinion as to the direction those changes will go.

Jeffrey Klenk, senior vice president at St. Paul Travelers Bond in Hartford, Conn., said the market is relatively stable, adding, “I think it's fair to say, generally at this point, that it's a softening market.”

Insurance companies have generally seen good results from their professional liability business and are looking to build on their successes, said Mr. Klenk, who is also president of the Minneapolis-based Professional Liability Underwriting Society.

“In general, companies feel pretty good, and the result is that they want to grow their businesses,” which is helping to maintain more competition among carriers.

Mr. Klenk said the softening trend in the professional liability market began “early last year,” and with companies continuing to look to increase their business, he saw little reason to believe things would change drastically in the near future.

Jeffrey S. Grange, senior vice president for worldwide professional liability markets with Chubb Specialty Insurance in Warren, N.J., also saw the year 2005 as one that was “a pretty stable environment.” Unlike Mr. Klenk, however, Mr. Grange said the market isn't softening.

Instead, the professional liability market, in his view, was generally flat from a pricing standpoint in 2005–”with some modest increases.” And Mr. Grange said he expects this year to be “very much the same.”

Both Mr. Klenk and Mr. Grange emphasized the general nature of the calm in the professional liability market and noted there are some areas that still present a challenge for insurers and higher rates for insureds.

Mr. Klenk said there are a few “pockets” where insurers are better able to increase rates for companies that have exposure issues. Typically, he said, this would mean companies that have had a bad claims history or increased exposure, or present insurers with more uncertainty in their future because of a recent merger or change in the company's direction.

Mr. Grange noted that many of the most troubled areas within the professional liability market are those in the financial services industry, which has seen more than its share of scandals in recent years.

“The ditch is pretty full of car wrecks,” he said, referring to those companies caught in the maelstroms caused by New York State Attorney General Eliot Spitzer or any other investigation.

As a result of the turmoil in the financial services realm, Mr. Grange said there is a “fairly scarce supply of available capacity” for large banks and other financial institutions.

For the more traditional types of professional liability, such as lawyers and accountants, Mr. Grange said he expected hikes that are “modest from a rate standpoint, with high single-digit increases.”

Elsewhere in the market, risks falling under the umbrella of “miscellaneous” professional liability remain “a fairly good environment,” Mr. Grange added.

Michael Cavallaro, a director with ARC Excess & Surplus, LLC in Garden City, N.Y., said the troubles in professional liability actually extend beyond the financial services realm to any large public company, such as those among the Fortune 500.

In general, there is still “ample competition” in the market, he said, but there is also what he called a “dichotomy in the market” in which the overall market is in a positive state in terms of pricing and competition (from a buyers' perspective), but there are also “pockets–types of accounts that have more exposure, where competition and the ability to negotiate rates aren't there.”

Even more troublesome for the companies in those pockets, and the brokers trying to help them obtain coverage, Mr. Cavallaro noted, is that advances in underwriting have helped more insurance companies identify where problems could exist, and which areas within the market to avoid.

“Due to the sophistication in underwriting,” he said, “a lot of underwriters have come to the same types of conclusions.”

Mr. Klenk also noted the increasing sophistication in underwriting and said much of the emphasis being placed by insurers on improving the accuracy of their risk assessment in underwriting can be traced to the previous soft market.

“The last soft cycle really hurt insurance company profitability so significantly that it caused all of them to look internally very carefully,” he said. As a result, companies have developed better assessment tools and are much more careful about what coverage they write.

“Insurance companies have gotten much, much smarter over the past five years,” he said, adding that they are “much more cognizant of the risks they are underwriting” and “much better prepared to draw a line in the sand.”

Additionally, Mr. Cavallaro offered an explanation for the varying views of where the market is headed, arguing that professional liability is in the unpredictable gray area between a hard market and a soft one.

“The toughest kind of market to predict is a market in flux,” he said. “If you have a hard or soft market, you know what to expect.”

From his standpoint, Mr. Cavallaro said insurers appear to be trying to “hold the line” on pricing, seeking to increase rates or, at a minimum, maintain their current levels. By his estimation, Mr. Cavallaro speculated that insurers have been successful at slightly increasing their rates roughly 10 percent of the time and have maintained their current levels for approximately half of their renewals.

Looking forward, he speculated that overall rates would decline slightly in the first half of 2006–by roughly 5 percent–”although that doesn't apply if you're a large public company.”

As with much of the insurance industry, the ultimate effects of Hurricane Katrina remain an unknown for the professional liability market.

Mr. Grange noted that the rush of new capital post-Katrina has flowed into other areas of the market. Mr. Cavallaro said those companies that operate in the professional liability segment may decide to shift their focus, and their own capacity, on other areas, or they may reduce their overall exposure.

“Less capacity means less competition,” Mr. Cavallaro said.

Mr. Grange also expected the market to become more difficult as reinsurers seek to increase their rates, but Mr. Klenk saw a larger, more fundamental question that remains unanswered.

“The bigger issue,” he said, “is, 'What is the extent of the purchasing marketplace right now?'”

St. Paul Travelers, he said, continues to work through its local offices in the areas devastated by hurricanes last year. However, the widespread destruction caused by Hurricane Katrina destroyed entire areas along the Gulf Coast and caused an extremely high number of people to, at least temporarily, abandon the area. The lingering issue, he said, is how much of a business, if any, these people will be able to return to.

The effect of the 2005 hurricane season on professional liability, however, will be “nowhere remotely near where the typical commercial exposure is,” Mr. Klenk said.

Overall, he believes professional liability insurers will be better able to manage their risks in the future and avoid the problems that can occur in a soft market. Much of that can be seen, he noted, in the way insurers are currently operating.

Although he sees the professional liability market as relatively soft, Mr. Klenk said insurers are not overextending themselves to increase business at the risk of exposure.

“It's not a free-for-all,” he said.