A common theme emerged from the marketplace during a recent trip I made to London to meet with several underwriters who specialize in professional liability insurance for design firms.
Most architects and many engineering firms have been significantly impacted by the current recession. Many architects have seen revenue reductions of 15% to 25% and design firms tied to the housing market have seen even further reductions in revenue. As such, these firms are hoping to see a parallel reduction in their professional liability insurance premiums at renewal time.
While the underwriters at the insurance companies are sympathetic to this situation, the economy has hurt them also. There are a number of factors that are pushing insurance companies to increase rates.
As underwriters explained, most insurance companies were not profitable in 2008. After several years of rate reductions (soft market conditions since 2004), the losses and expenses from professional liability insurance claims are now about equal to the insurance premiums being collected. Most insurance companies target their combined underwriting ratio at about 94% (losses plus adjustment expenses plus underwriting expenses/net premiums). They hope to make about 6% on underwriting insurance and another 6% or so on investment income on the premiums held before losses are paid. Last year, most insurance companies had a combined ratio of 99% - 103%. Specifically, in the area of professional liability insurance, increased losses were caused by modest increases in both frequency and severity of claims.
To compound these losses the 2008 hurricane season was the third most costly on record, behind only the 2004 and 2005 seasons, with more than $41 billion in damages. Hurricane Ike (damages of $32 Billion) and Gustav (damages of $8.5 Billion) were quickly forgotten by the press but Ike was the third most destructive hurricane ever to make landfall in the United States behind Andrews (1992) and Katrina (2005).
To make matters worse, many US insurance companies earned no investment income last year and in some cases experienced significant losses. The stock market declined significantly and interest rates dropped to historic low levels while default rates on mortgage-backed bonds increased.
Stock losses and bond default rates impacted UK based insurance companies to a lesser extent than US companies because British insurance regulations require UK insurance companies to remain invested primarily in government bonds.
The underwriters expressed a number of views about their expectations for the upcoming year. Most underwriters pointed out that the claims that will be reported this year are likely to be on work performed last year, when the volume of activity was much higher. Claims on design projects typically occur at the end of construction or within a couple of years thereafter. So even if a firm's revenues are down, that does not mean that their claims exposure is reduced.
Another concern expressed by underwriters is that economic hard times tend to produce more claims. Many developers are getting crushed by the lack of demand for their housing and office space projects. Developers often seek any means possible to help offset their losses and claims against design professionals are likely to increase as a result.
All of these factors point to higher rates for professional liability insurance for the next year. However, offsetting this is the fact that there appears to be plenty of capital capacity in the overall insurance market. The insurance business does not operate logically and even thought an underwriter may be concerned about accepting risks that will ultimately lead to an underwriting loss, it is hard to increase rates when other companies are willing to write the risks at current rates. When there is adequate capital capacity, underwriters must carefully balance the chance of losing accounts against achieving higher rates.
A typical strategy for underwriters in these market conditions is to seek to maintain their good customer base and increase rates on the firms that have anything less than a flawless claims history. Underwriters will frequently test rate increases on their account base but will ease up if this proves to result in accounts changing carriers. Finally, they will selectively compete for new accounts and favor accounts that have goods claims experience.
As insurance brokers, we will do what we do best; we shop for insurance on behalf of our customers. For new customers this means developing competitive alternatives to their existing coverage. Our job is to know the market for professional liability insurance and get the market to [perform for our customers. We currently are the broker for 3.623 design firms nationwide and, as such, negotiate about 300 professional liability insurance transactions a month.
As specialist in A/E professional liability we can identify and explain the coverage differences between the policies of the various carriers. Often our customers start out thinking that "all policies are the same", but after they learn the differences, they have definite preferences for what they want in terms of coverage features, policy limits and deductible structures. Of course, the final factor is price but I am surprised how often we can provide better coverage terms at an improved price.
Our results speak for themselves. Our hit on new business is 40%. That means that when we compete for an account against a firm's existing broker, we provide the best insurance alternative about 60% of the time. Then, about 20% of the time, firms will decide to stay with their existing broker or carrier. However, 40% of the time a new account will place their business through us.
Understanding the sources and coverages available for A/E professional liability insurance is a complex task. Last month. For example, we placed processional liability insurance with 17 different insurance companies. About 75% of this insurance was placed with about 5 insurance companies. But the remaining 12 companies provided an important role in writing coverage for the remaining 25% of our account base. The challenge is that each insurance company's specific appetite is ever changing. Staying on top of these changes is a key topic at our weekly staff meetings. For each type and size of design firm there are usually two or three insurance companies that will compete effectively. Our job is to know which insurance companies will perform for each of our customers.
In renewing business with our existing customers our approach is:
To demonstrate a very high level of customer service over the policy year
To get our customer's existing carrier to provide a competitive renewal option, and finally, to produce quality alternatives if the existing carrier's quotes are not competitive.
Every insurance agent promises good customer service but delivering it is a priority for us. In addition to providing the right coverage at a competitive price, service means a lot of little things; like being easy to reach, responsive, and offering specialized knowledge. Once a customer has experienced excellent service, they want to keep it.
Most customers would prefer not to change carriers if they can avoid it. There are reasons why the existing carrier was selected in the first place and there are benefits to maintaining continuity of coverage with the same carrier. As such, if we negotiate a genuinely competitive quote from the exiting carrier we have served our customer's best interest. However, if the existing carrier's quotes are less than fully competitive, we respond by developing and offering the market's other alternatives.
Michael Hall is the President of the firm. Mike has an engineering degree and worked as a surveyor for the USGS and as an engineer for CH2M Hill, each for a couple of years. After completing an MBA at Harvard, he started as a management consultant before founding his own consulting practice in 1985. The initial focus of the practice was on ownership transfer planning and strategic planning services to engineers and architects.
No comments:
Post a Comment