During my recent trip to London to meet several underwriters who specialize on professional liability insurance for design companies, a common theme emerged.
Many engineering firms and architects have seen their revenue drop by 15% to 25% in the current recession. Many architects have experienced revenue decreases of 15%-25%, and many design firms linked to the housing market saw even more revenue declines. These design firms expect to see a similar reduction in their professional liability insurance premiums during renewal.
The underwriters at insurance companies understand this, but the economy has also hurt them. Insurance companies are being pushed to raise rates by a variety of factors.
According to underwriters, the majority of insurance companies were unprofitable in 2008. After years of rate decreases (soft market conditions from 2004), professional liability insurance claims losses and expenses are about equal to insurance premiums being collected. Insurance companies aim to have a combined underwriting ratio of 94%. This includes losses plus adjustment expenses and net premiums. They aim to make about 6% from underwriting insurance, and an additional 6% or so from investment income on premiums that are not lost. The combined ratios of most insurance companies were between 99% and 103% last year. Particularly, the increase in claims severity and frequency in professional liability insurance caused increased losses.
These losses were compounded by the fact that the 2008 hurricane season was the third-most expensive on record, after only the 2005 and 2004 seasons with more than $41 Billion in damages. Although Hurricane Ike’s damages of $32 Billion and Gustav’s damage of $8.5 Billion were quickly forgotten by the media, Ike was the third most devastating hurricane to hit the United States after Andrews (1992), and Katrina (2005).
Even worse, many US insurance companies lost significant amounts of money last year. The stock market fell significantly, interest rates dropped to historic lows, and default rates on mortgage-backed securities increased.
UK-based insurance companies were less affected by stock losses and default rates than US companies. This is because British insurance regulations require that UK insurance companies remain primarily invested in government bonds.
The opinions of the underwriters on their expectations for the next year were varied. Many underwriters noted that claims will be reported on work that was performed in the previous year when there was more activity. Claims for design projects are usually filed at the end or within a few months. Even though revenues may be down, this does not mean that claims exposure for a company is decreased.
Underwriters also worry that economic difficulties can lead to more claims. Many developers are feeling the pinch from a lack of demand for their residential and office space projects. Developers are always looking for ways to make up the difference and claims against professionals in design will likely increase.
These factors all point to higher professional liability insurance rates in the coming year. Fortunately, there is plenty of capital available in the insurance market. The insurance industry isn’t logical and although an underwriter may be worried about taking risks that will eventually lead to underwriting losses, it’s difficult to raise rates when there are other companies willing to take on the risk at current rates. If there is sufficient capital, underwriters should carefully weigh the possibility of losing accounts with the potential for higher rates.
In these market conditions, an underwriter’s typical strategy is to keep their customer base happy and raise rates for those firms with poor claims histories. If rates are increasing, underwriters will test them. However, if they find that accounts have changed carriers, they will reduce their rate increases. They will also be selective in their search for accounts with goods claims experience and will favor accounts that are open to new customers.
We are insurance brokers and will do what we love best: shop for insurance on behalf our customers. This includes offering competitive alternatives to existing insurance coverage for new customers. Our job is to understand the market for professional liability insurance, and to get the market to perform for our customers. As the broker for 3.623 design agencies nationwide, we currently negotiate around 300 professional liability insurance transactions per months.
As specialists in A/E professional liabilities, we are able to identify and explain differences in coverage among the different carriers. Many customers think that all policies are the same, but once they understand the differences, they can make their own choices about coverage, policy limits, and deductibles. Price is the last factor, but I am always amazed at how often we can offer better coverage terms at a lower price.
Our results speak for themself. Our hit rate on new business is 40%. We are the best alternative to a firm’s current broker when competing for an account. This means we can offer insurance that is at least 60% better than the existing broker. In about 20% of cases, companies will stay with their existing carrier or broker. A new account can be opened for 40% of businesses.
It can be difficult to comprehend the various coverages and sources available for A/E professional insurance. Last month. We placed processional liability insurance with 17 insurance companies. 75% of the insurance was purchased with 5 companies. However, the remaining 12 companies played an important role in writing coverage to 25% of our account base. It is difficult because each company’s insurance appetite is constantly changing. Our weekly staff meetings are devoted to keeping up with these changes. There are typically two to three insurance companies that can compete for each design firm, depending on its size. It is our job as designers to find the best insurance companies for our clients.
We use the following approach when renewing business relationships with existing customers:
To show exceptional customer service during the policy year
To obtain a competitive renewal option from our customer’s carrier, and to finally produce quality alternatives, if the carrier’s prices are not competitive.
We are committed to providing excellent customer service. Every agent can promise it, but we must deliver it. Apart from providing the best coverage at a reasonable price, service also includes being responsive and easy to reach as well as offering expert knowledge. Customers will want to retain excellent service once they have had it.
Customers would rather not change carriers if possible. There are reasons why an existing carrier was chosen and benefits to continuing coverage with that carrier. We have done our best to serve the customer’s interests by negotiating a competitive quote from the exiting company. We respond if quotes from an existing carrier are lower than competitive.