Professional liability insurance is a vibrant, interesting, and growing segment of the property-casualty insurance market. If membership growth of the Professional Liability Underwriting Society (PLUS) is any indication, the market has exploded in the last 20 years. PLUS membership, which numbered roughly 1,000 in 1993, is now close to 7,000. According to SNL Financial LLC, medical malpractice and D&O total premiums approach $16 billion, excluding other professional liability lines such as employment practices, non-medical E&O (including cyber liability), and fiduciary liability. Almost one-fourth of PLUS members are agents and brokers, most of whom are heavily involved in the professional liability arena.

Directors and Officers (D&O)

Kevin Ishizu, senior vice president and national practice leader, public D&O insurance for Wells Fargo Insurance Services, oversees a portfolio of clients ranging from IPOs to Fortune 500 companies. He said public company D&O insurance continues to be a “buyer's market,” due to relatively low securities class action frequency, a high rate of dismissals and an abundance of capacity.

Strong carriers dominate the market, and although premium increases in the low single digits are the norm, the price per million in coverage remains low when compared to historic pricing indices, he said. Additionally, the price increases on the primary layers do not necessarily carry through to the excess and Side A DIC layers. “There appears to be a continuing theme of 'first-to-file' derivative litigation and merger objection cases, but the market appears to have addressed these exposures with increased retentions in lieu of imposing meaningful premium increases,” he said.

On the other hand, premiums for IPOs are firming. “Historically, the risk of a securities class action on IPOs has been substantially higher compared with their publicly traded peers, and now the Jumpstart Our Business Startups (JOBS) Act has been labeled as the catalyst for a more scrutinizing market,” he said. “Brokers with the most success are well-versed in the JOBS Act and can guide their clients through the changes in the underwriting process that have developed since the Act became effective.”

Brokers and carriers should be prepared to discuss potential strategies and possible usage of “pre-deal” and “test-the-waters” presentations. Carriers also should be prepared to discuss internal controls in more depth, as several carriers have cited concern with the JOBS Act provision that substantially pushes back SOX 404 auditor testing of internal controls.

D&O for private and non-profit companies is another market entirely, according to Stephen Hunziker and Dennis Donovan, both executive vice presidents for RT ProExec.

Related: Read “Professional Liability Trends“

This market is in a transitional period, with long-term players seeing profit erosion by increased claims activity increasing both premiums and retentions. This is opening the door for the next generation of players, creating an abundance of capital. Typical renewal premiums are seeing increases as high as 30 percent, along with increased retentions. However, for “clean” accounts, plenty of carriers are willing to jump in at terms and conditions on par with the expiring coverage.

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

As a result, carriers are reevaluating their intended scope of coverage and how to properly price for the risk. This includes refining underwriting guidelines, coverage wordings, and rates. For example, some carriers have exited sectors like 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.

Medical Professional Liability

This marketplace continues to be profitable for most underwriters, with an industry combined ratio under 100 since 2006, said Philip Reischman, executive vice president and managing director of Alliant Insurance Services. Most healthcare organizations have multiple options on renewal, with both rate and premium reductions. Key drivers of this competitive environment are:

• Favorable frequency and severity trends: Claims frequency is flat, due to patient safety and quality initiatives. Severity is trending up, but at a lower and predictable rate, allowing insurers to fine tune rate models.

• 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 appetites, in spite of concerns about the impact of healthcare reform, Reischman said. These trends also are evident in the reinsurance market for medical professional liability insurers, which are 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.

Related: Read “High Risk, High Reward“

Employment Practices Liability

EPL, which didn't exist 20 years ago, is now an integral part of any company's risk management program. The EPLI marketplace continues to evolve and change, having grown from only a handful of carriers to more than 50 insurers offering the coverage, said Debbie Hughes, vice president and EPL producer leader for Wells Fargo Insurance Services. However, in spite of abundant capacity and competition, the market is tightening, driven by continued economic uncertainty, a historically high number of charges filed with the Equal Employment Opportunity Commission (EEOC), broadened protected class status, and an increase in covered EPL claims, and their related legal costs.

Protected classes were broadened with the revision of the Americans with Disabilities Act in 2010, yielding more EPLI claims based upon discrimination, harassment and termination, Hughes said. The EEOC is focusing on new initiatives, so future claims will arise from a variety of sources, including the Genetic Information Nondiscrimination Act of 2008, ADEA Reasonable Factors Other than AGE, Transgender EEOC Commission Opinion (2012) and background checks. “We expect continued legislation and administrative rulings that will expand the ability of employees to bring action against their employers,” she said.

Claimants filed almost 100,000 charges with the EEOC in 2012 with retaliation, race and sex discrimination charges the most frequent allegations, Hughes said. In 2012 alone, the EEOC recovered $365.4 million. Fair Labor Standard Act (FLSA) litigation continues to be problematic for many organizations. Carriers typically do not cover these types of claims, although a handful provide sublimits for defense costs only. Some Bermuda markets will provide stand-alone FLSA policies, but only with high retentions and premiums high.

Social media and the Internet also create exposures for employers, Hughes said. Although employers have the right to monitor employee usage of computer or email systems, there is still a right-to-privacy issue that arises from these actions. To protect themselves, employers should implement a clear written policy on computer usage; update policies and procedures that reserve the right to access and use employee electronic information on employer equipment, and ensure compliance with state and local laws. Employers also must keep current on how the courts interpret privacy laws in the workplace, Hughes said.

Cyber Liability

As targeted network attacks increase and the privacy and data security environment is increasingly regulated, more companies will seek to transfer the risk to an insurance product, fueling competition among carriers, said Meredith Schnur, senior vice president of professional risk at Wells Fargo Insurance Services.

Although both capacity and demand are at an all-time high, underwriters are learning to better evaluate these risks. Although the U.S. leads the world in regulating privacy risk, Schnur expects to see increased regulation in the European Union, Canada and the Asia Pacific region, an evolution that may present challenges for multinational organizations.

Related: Read “Small Business, Interrupted“

More than 30 carriers now offer network and privacy insurance products, compared with five carriers 10 years ago, Schnur said. Some may exit the market if their limited books see significant losses, or if plaintiffs are successful in moving class actions to trial. Current total market capacity is estimated at more than $450 million, including $300 million for third-party liability coverage—legal costs and damages and roughly $150 million for first-party coverages like business interruption and data asset loss.

As carriers assess the rapidly evolving risk environment, they continue to monitor the frequency and severity of breach events. Claims frequency is increasing from the theft or loss of portable devices, some of which contain unencrypted data, creating privacy concerns and triggering certain duties mandated in the event of a privacy breach, Schnur said. Fines and penalties also can be assessed against the company arising out of such events. On the severity side, Schnur sees an increase in targeted attacks that use weapons such as complex malware and advanced persistence threats (APTs). These highly sophisticated attacks usually cause both network and privacy risk concerns. Short-term harm to reputation is of even greater concern since these types of events are often publicized in the media.

The industries that are most interested in purchasing network security and privacy liability insurance are healthcare, hospitality, retail, financial, and others that are highly regulated or work with large volumes of personally identifiable information. Government contractors, law firms and other organizations that perform highly confidential work are preparing for the next wave of attacks. Many written contracts require service providers to obtain coverage not only for professional and/or technology E&O, but also for network security and privacy liability, Schnur said.

Given the record number of carriers jumping into this hot market, it is extremely important to choose a carrier that has both the commitment and the expertise to handle complex claim situations in network risk and privacy liability.

The Market in General

What does all this mean for independent agents and brokers? Chris Christian, CIC, RPLU, vice president/senior broker with U.S. Risk, sees a “ripple effect” in the professional liability services agents and brokers provide when insureds excessively shop for terms. “It starts with the insureds, or with panicked agents, and it's causing what could become an insurmountable obstacle regarding how our industry handles volume,” she said. “Insureds are putting tremendous pressure on their agents, and agents are taking a defensive position in anticipation of competition. As a result, instead of shopping the market thoroughly every 3 years or so, they're taking risks to market every year, and looking for multiple quotes annually.”

Although this would appear to be a good thing for the insureds, it actually results “underwriter burnout,” in which underwriters refuse to quote an overexposed submission.

“It takes great deal of restraint, ongoing education, and a lot of trust between the insured and agent, or the agent and wholesaler, to avoid falling into this trap,” she said.

The other problem this phenomenon causes is on the carrier side: a lack of staff to deal with all those submissions. “Carriers cannot possibly staff up for submission flow they are seeing. They can only staff up for top line or bottom line growth,” she said. Underwriters that were handling 25 submissions a week are now seeing 100, which means many submissions will be ignored.