The D&O marketplace for private companies and non-profits is in a period of transition. The long-time, long-term players have seen their profits eroded by increased claim activity. As they look to increase premiums and retentions, the next generation of players is stepping in to fill the void, so there is still an abundance of capital. Typical renewal premiums have risen from 10 percent to 30 percent, depending on the risk, with retentions increasing as well. However, for clean accounts, there still are plenty of carriers willing to jump in at terms and conditions on par with expiring levels, he said.

“This coverage has evolved into such broad insurance contracts that claims can emerge from a very broad spectrum of possible plaintiffs and scenarios,” Hunziker said. It is safe to say that D&O carriers have been confronted by types of claims that they never envisioned. D&O exposures have always been financially oriented exposures, and the ripple effect of the recession is still being felt in D&O claim departments.

Carriers are actively reevaluating their intended scope of coverage and how to properly price for the risk. This includes refinement of underwriting guidelines, coverage wordings, and rates. For example, some carriers have exited certain industry sectors such as car dealerships, hospitality and other service industries. Many have attempted to pare back or eliminate coverage for wage-and-hour claims. Underwriters have refocused on the financial health of their insureds, leading to more declinations and non-renewals, or the impositions of bankruptcy exclusions. “One thing is certain: There will continue to be a divergence of approaches taken by underwriters in trying to tame the always-dynamic nature of the D&O exposures,” he said.

Management liability

Glenn Clark, CPCU, president, Rockwood Programs

Coverages under the management liability umbrella include errors & omissions (E&O), directors & officers (D&O), and employment practices liability (EPL), with EPL being especially big for severity, frequency and litigiousness, Clark said. In general, EPL is a hot coverage now because of increasing litigation connected to the poor economy and people losing their jobs.

For EPL, the level of risk varies widely, depending on the litigiousness of the state in which a company is doing business (for example, California is high, Utah low); high urban populations, and whether there are a lot of plaintiffs' attorneys operating in the region.

The type of liability also influences state differentiators, he said. For example, although California can be a tough market for general E&O, it isn't bad for medical malpractice, as state law caps pain and suffering awards at $250,000, he said.

EPLI pricing and availability depends on type of business and claim frequency. Restaurants, which have high employee turnover and alcohol exposure, face a tougher market. Core exposures covered are wrongful termination, sexual harassment and discrimination. A huge potential exposure is coming as businesses concerned about Obamacare transition workers from full time to part time to avoid paying benefits.

The highest E&O risks typically involve fiduciary responsibility. For example, although a title agent's job may seem straightforward, they can be considered higher risk if they manage escrow account and are holding other people's money, he said.

As far as pricing, “we're in the beginning stages of a firming market; in management liability, we're seeing rate increases for the first time in 10 years,” Clark said. He is also seeing significant growth in captives to share the risk among multiple risk-takers.

“For agents, this means high-risk clients will need you more than ever,” he said. “Our company has been specializing in EPLI since the first policy came out in the early 1990s. When companies have a problem placing risk, they know they can come to us. It's an opportunity to demonstrate your expertise because a standard agent can't place that coverage on the tougher accounts.”

In the future, “I don't think the U. S. is going to become less litigious, so the need for these coverages will continue to grow,” with whole classes of business needing education on the exposures involved. For example, there are about 18,000 bail bond agents in the U.S., but few carry professional liability insurance. “It's a potential target market that we've been working on for several years, yet the prospect base has to be made aware of their liability exposure. We spend a lot of time researching underserved niches that need to be educated on the fact that they have significant liability risk.”

Cyber liability

Michael Lamprecht, president, Big Data Insure

Cyber liability protection is especially important for businesses that collect a lot of confidential corporate information or personally identifiable data: financial institutions, healthcare companies, technology companies that do credit card processing, and law firms.

Although the perception is that most scammers steal this information for identity theft, corporate information is increasingly targeted for other crime, Lamprecht said. For example, law firms are at risk because of the information they collect on potential mergers and acquistions can be used for insider trading or other unfair practices.

Although retail cyber breaches get the most publicity, financial institutions are at the greatest risk. If a large broker dealer has a site crash, trades are lost and the losses could be in the millions of dollars. One of Lamprecht's clients predicted a 72-hour timeline to financial failure.

Many carriers are reluctant to write cyber liability coverage for businesses that already have professional liability coverage, mostly because of the need for extensive customization to a generalized policy. In general, about 35 markets are using one cyber liability policy for every sort of business. Customizing a policy for each business type is time consuming and can actually increase risk exposure for the buyer, he said.

However, because of the glut of insurers marketing cyber liability insurance, with new players jumping in all the time, “just about anything can be placed in this market today.”

In the early years, cyber liability policies were priced extremely high, mainly because underwriters feared loss aggregation, but prices have declined over the past 5 years; annual renewal rates are down between 7 percent and 12 percent, Lamprecht said.

As the market matures, cyber policies will become specialized by industry type, paralleling the evolution of the professional liability market. Insurers are beginning to add more endorsements to generic cyber policies to address the specific needs of financial institutions, healthcare and law firms. Like professional liability, policy evolution “starts with endorsements and ends as a stand-alone policy.”

Agents and brokers must overcome the one-size-fits-all attitude toward cyber liability and become experts on their clients' unique exposures, Lamprecht said. “The cyber exposure of financial institutions is very different than for a law firm, so agents must be very aware of the gaps that exist between those policies, and be sure the clients get the coverage they pay for.”

Medical malpractice

Philip Reischman, executive vice president and managing director, Alliant Insurance Services

In its current state, the medical professional liability market is still very profitable for insurers. The combined ratio for the industry has been under 100 since 2006, Reischman said. It's a good market for buyers, too: Most healthcare organizations have multiple options on renewal, with both rate and premium reductions.

The key drivers of this competitive environment are:

· Favorable frequency and severity trends: Claims frequency is flat, due in part to successful patient safety and quality initiatives. Severity is trending upward, but at a lower and predictable rate, which allows insurers to fine-tune rate models that lower rates for many buyers.

· Consolidation of healthcare organizations: Driven by healthcare reform, hospitals are merging and acquiring physician practices, medical groups are combining to bulk up in size, and the growth of accountable care organizations (ACOs—groups of doctors, hospitals and healthcare providers) allows risk sharing. The result is fewer potential clients with higher levels of self-insurance, leaving fewer opportunities for the commercial insurance market.

This combination of profitability and a shrinking client base has attracted new entrants and caused long-time players to expand their underwriting appetite, in spite of concerns about the impact of healthcare reform, Reischman said. These trends are also evident in the reinsurance market for medical professional liability insurers, which are also consolidating and taking higher retentions.

“In short, it remains a buyer's market for medical malpractice coverage and the cost pressures faced by healthcare organizations will tempt most insureds to consider alternatives, despite a desire to remain loyal to long-term risk-financing partners,” he said.

Coastal property

Michael Ray, CPCU, CLU, chief executive officer, Orchid Insurance

Capacity drives demand—and ever since Superstorm Sandy, the market for excess flood coverage has become a major concern for coastal property owners.

It's a tough market for both buyers and insurers. Admitted companies that set rates, establish reinsurance arrangements and maintain surplus levels to support “A-“ or higher A.M. Best ratings find it increasingly challenging to obtain regulatory approval to achieve the needed rate levels and provide stockholders with acceptable returns of equity. When admitted companies decline, the nonadmitted market–Orchid Underwriter's specialty–fills the void. But even that coverage is increasingly scarce in regional areas heavily exposed to hurricane perils, such as in the Southeastern states and the Gulf Coast states.

Current market conditions make it especially ticklish for agents and brokers to navigate relationships between customers and carriers. “They hear it from both sides: Consumers don't know why they have to pay higher premiums for their insurance with no claims, and they also have to deal with carriers to place business within underwriting guidelines and absorb nonrenewals,” he said. “It's a challenging situation representing interest for both sides.”

Over the past 3 years, pricing in general for both admitted and nonadmitted coverage has increased to reflect the higher cost of reinsurance. Rates have stabilized somewhat this year as reinsurers have moderated what they charge for cat prices. Although tracking pricing trends year-over-year can be misleading because pricing varies depending on the type of property, in general prices have risen in the double digits compared with 5 years ago, Ray said.

Risk mitigation makes a dramatic difference in pricing and availability. For example, although homes with shutters or wind-impact glass combined with newer roofs are more likely to be considered eligible by admitted carriers, the closer a property is to the coast, the greater the likelihood of a major loss following a wind event, and the more difficult it is to obtain coverage in the admitted market, Ray said.

And the market upheaval isn't over yet. “I'm not convinced that the full effects of Sandy have been felt in the marketplace; admitted companies are still trying to find out what levels of rates they need or are acceptable to regulators,” he said. “We might see continued tightening over the next 2 years in areas affected by Sandy and other geographical areas close to the coast.”

A trend with a significant impact on the market is risk mitigation and stronger building codes. As these expand, markets will be more willing to provide coverage in hurricane-prone areas. More cat events could cause some realignment of weaker companies, and another major event could shift capacity away from smaller companies.

Cat modeling is also playing a major role in the market. A.M. Best and other rating authorities rely on it for rate analysis and risk management. Property insurers also use it for internal management of their property insurance programs. As modeling scenarios become more accurate, underwriting quality will improve, giving investors more confidence.

Educational institutions

Bryan Elie, vice president of underwriting, United Educators Insurance

Educational institutions of all sizes and types face a wide range of exposures: everything from simple slip-and-falls to general liability and EPL claims, Elie said. United Educators, a risk retention group, sees “a lot of volatility” to loss experiences. “We realize that there is the potential for catastrophic claims–sometimes they can be huge. That makes it harder to predict where losses might be coming from and puts education into a high-risk category,” he said.

In general, coverage forms and the market have been stable over the last several years. The market went from soft to firming over the last 2 years as carriers began tightening underwriting standards and increasing premiums and deductibles. However, there have been few coverage changes and plenty of capacity. “The feedback we're getting from our brokers is that most of our competitors are seeking rate increases on renewal business, across all lines, but are aggressive about new business,” Elie said.

Although pricing increases can result from loss experience, educational institution claims can take as long as 6 years to develop, so it could be 5 years before a carrier begins to feel the need to adjust premiums, Elie said.

Typical general liability claims arise out of athletic incidents, auto accidents, assault (sexual or physical), and slips and falls, which can be costly (for example, a grandparent falling at commencement). From an educational legal liability standpoint, claims arise as educational institutions adapt to budget pressures, forcing changes such as program closures. There are also intellectual property claims at research institutions and IT-related claims. Allegations of discrimination, sexual harassment, and date rape on college campuses are increasingly gaining high-profile status, meaning that what would have been solely a general liability claim triggers both EPL and GL policies.

Educational institutions also deal with issues surrounding Title IX, which mandates gender equality in education. The federal funds that many educational institutions rely on are contingent on compliance with this and other legislation, some of which hinges on required training. United Educators provides Title IX advisories and online training to assist its clients.

As a risk retention group, United Educators primarily provides general liability, umbrella and educators' legal liability, with the latter coverage generating the most frequent claims, driven by EPL. “Our risk management resources, across all segments of education, focus on training to prevent discrimination and harassment. We have been investing in online learning, providing resources to get at the deepest level on campus, so staff, faculty, everyone can be educated,” Elie said. This includes online training, resource guides and webinars to allow educational institutions to dig into specific issues, such as sexual harassment.

United Educators' most successful brokers are those who invest the time to understand the inner workings of educational institutions and recommend the right mix of carrier resources and insurance, and really focus on selling value, he said. “We typically have long-term relationships with insureds as well as their brokers. Educational institutions are loyal customers and value buyers that look for the right mix of price and value; they respect carrier stability, knowledge, and efficient claims handling. Brokers who understand that mentality will be most successful.”