Professional Liability Challenges
Rates in the professional liability market are coming under increased pressure as a result of overcapacity and greater competition, with industry experts warning of dire consequences in the long term if it continues.
Among the areas hardest hit are directors’ and officers’ (D&O) and medical professional liability (MPL).
John Lopes, vice president of programs at Freedom Specialty Insurance, said overcapacity posed the biggest threat to insurers in the short and long term.
He said new entrants and smaller players would find it hard to build profitable scale without a competitive advantage other than price, and those who succeeded would likely do so at the expense of existing providers.
“Either way, the longer term issue is one of market saturation and fragmentation,” he said. “This will put pressure on pricing and profitability until market forces break the cycle.”
Christian Gravier, president of professional lines at Allied World North America, said that rates and terms and conditions for public D&O and side A difference in condition (DIC) were under the greatest pressure from increased competition and capacity.
“Sustained profitability of the product has made it extremely attractive and hence capacity is drawn to the line and rates have seen, in some areas, a precipitous drop,” he said.
Gravier said the increased use of capacity by competing insurers was causing disruption in some of the bigger markets, with larger limits of $25 million and $50 million becoming more prevalent.
Jeff Klenk, senior vice president of bond and financial products at Travelers, however, said that despite the surfeit of capacity, some more specialist areas had experienced rate increases.
“Capacity continues to be plentiful and the state of competition is very risk-specific,” he said.
“In those lines of business that have had more challenging results, or on accounts with more complex risks, we have seen rate increases.”
But it’s really cutting-edge sectors like cyber and privacy liability that are offering the most potential for growth as companies realize the extent of their exposure to data breaches and attacks, and brokers gain a better understanding of the product.
Chris Duca, senior vice president at RT ProExec and 2014 president of the Professional Liability Underwriting Society (PLUS) — which will be hosting its annual conference in November — said that alongside cyber, errors and omissions (E&O), and D&O lines in privately held as well as publicly traded and initial public offering (IPO) corporations offered the biggest growth potential.
He added that there was also increased demand for management, professional and health care liability, and MPL.
D&O is one of the biggest professional liability markets by premium volume. It’s estimated to be worth $6 billion in the U.S. alone, according to Allianz Global Corporate Specialty.
But despite the sector’s size and success, it has not been without its problems, stemming largely from the increase in claims after the 2009 financial crisis.
Damian Brew, national practice leader, FINPRO claims, at Marsh, said the biggest challenge facing D&O brokers is getting clients interested in new products.
A prime example, he said, was the level of cover D&O policies provide for entity investigation costs, in light of the Securities and Exchange Commission’s (SEC) renewed focus on company investigations.
“From that standpoint, many of those costs can be covered under a D&O policy,” he said, “but there are times when they fall outside of that coverage, and as a result we are now seeing more insurers offering specific cover for entity investigation costs.”
Medical Malpractice Risks
As a sector, medical professional liability accounted for $7.7 billion in premiums in 2013, according to A.M. Best, making it the No. 1 professional liability market by size.
Best’s August 2014 market report said that MPL underwriting and operating returns continued to outperform most of the property/casualty industry in 2013, despite the soft market.
It attributed that success to improvements in tort reform, better patient safety, a greater emphasis on loss mitigation and risk management, and more aggressive legal defense tactics.
SNL Financial, meanwhile, reported that despite MPL premiums continuing to fall in 2013, losses also declined to $4 billion in 2013 from $4.17 billion in 2012. The bulk of the drop in written premiums was in coverage for physicians, which fell to below $6 billion in 2013 from $7.18 billion in 2008.
“Medical professional liability is still the largest professional liability market by size.”
However, cover for other health care professionals grew to $1.2 billion in 2013 from under $1 billion in 2008.
Despite its relative success, the market remains highly sensitive to any price changes, one industry expert warned.
Robert Allen, president of Pro-Praxis Insurance, said, “All it takes is for one company to underprice the business and it has an effect on keeping pricing suppressed for the next year, raises the expectations of brokers looking for the best deal for their clients, and therefore makes it even harder for us to collectively move pricing to the right level.”
However, he added that there were areas of opportunity for growth, namely allied health facilities such as physical therapy and convenient care clinics, which have expanded at a phenomenal rate since the introduction of the Affordable Care Act (ACA).
“The growth in that space right now is just amazing,” he said.
Elke Kirsten-Brauer, executive vice president and chief underwriting officer of the medical liability division at MGIS Cos. Inc., said the MPL industry continues to face a multitude of challenges, including new patient populations entering the marketplace for insureds, and an increasing number of older patients with more complex illnesses.
Uncertainty surrounding tort reform in different states, a rise in vicarious liability claims and the heightened risk of cyber and privacy breaches add to those issues, she said.
As a result, she said, the industry needs to look at how it assesses and rates new liabilities and exposures.
“The insurance industry needs to look at data and tools from the past and make sure it revises and refines its approaches for the future,” she said.
Emergence of Cyber Liability
The hottest area in professional liability is undoubtedly cyber and privacy liability.
Philadelphia Insurance Cos.’ senior vice-president of underwriting, Ziad Kubursi, said that cyber liability was the main driver for demand in professional liability because it affected almost everyone.
Marsh’s Brew, meanwhile, believes the market will grow exponentially over the next five to 10 years as more insurers look to write the business and gain access to better loss history data.
“I think everyone is waiting for the next shoe to drop,” he said.
“It’s an exciting area where we have seen a lot of growth and I would expect to see more growth.”
Jim Whetstone, senior vice president and professions practice leader at Hiscox, said that companies were increasingly adding cyber and privacy data breach to their general professional liability policies to protect themselves against these new risks.
“We have seen increased demand for cyber and privacy cover as more brokers understand the product now and are able to explain it to their clients,” he said.
Impact of Legislation
Another big growth area is franchisors’ liability, which covers franchisers against lawsuits brought by franchisees.
Earlier this year, the National Labor Relations Board (NLRB) ruled that McDonald’s can now be considered a “joint employer” and held liable for the employment practices of its franchisees.
Peter Taffae, managing director at ExecutivePerils, said the ruling could have far-reaching implications for all company employment practices.
“The majority of franchisees don’t want to be told how to hire their employees or what to pay them because they are all independent businesses that operate on their own,” he said.
“What’s happened from an insurance E&O perspective is that some providers are now pulling back from offering this kind of cover and others are not offering it at all, meaning that prices are going up across the board,” Taffae said.
Planning for the Future
These are worrying times if you are the owner or principal of an independent agency and broking firm.
A recent survey by Reagan Consulting found that nearly six in 10 (56 percent) agency principals are 55 or older, meaning that most will probably retire in the next 10 years.
But according to the newly elected chairman of the Independent Insurance Agents & Brokers of America (IIABA), David Walker, many of them have no succession plan in place.
One of Walker’s first tasks in his new role will be to help IIABA — the Big “I” — draw up a long-term strategic plan to tackle the issue.
“I think the average agent nationwide is struggling with perpetuation and the process for them to continue their company moving forward,” he said. “It’s really a question of how do we attract and put in place the new talent that will succeed us as the company leaders of the future.”
Walker warned of the consequences of not addressing a succession plan until it’s too late.
“If this succession plan isn’t in place, then in most cases the only solution is to merge or sell the business,” he said. “You can’t wake up two or three years before you’re going to retire and say, ‘Wow, how am I going to monetize this great asset I’ve got and how do I perpetuate the business if I don’t want to sell it?’ ”
The onus, Walker said, is on trade associations like the IIABA to help provide the necessary structuring and financing tools for owners who want their businesses to live on after they step away.
Bob Rusbuldt, president and CEO of the IIABA, described Walker as a “true leader” of the U.S. independent agent and broker community.
“David is incredibly articulate and a great communicator, and he has a real vision of where he wants to take the independent agency and broker system,” he said.
Opportunity and Growth
And where he wants to take the system is to a larger focus on recruiting, doing more to entice young new talent in the door.
“We have got to show the young people of today what a great opportunity it is to be in this industry, particularly if you are an entrepreneur who wants to get out there and prove yourself and be in control of your own destiny — the sky’s the limit,” he said. “But we have got to do a better job of communicating that message and getting them engaged with it.”
As part of that communication effort, Walker is a national faculty member for the CIC Agency Management Institute and The National Alliance Agency Management institutes throughout the country, said Darelle White, senior academic director at The National Alliance for Insurance Education and Research.
“In addition to serving as a CIC faculty member, he currently serves on our Agency Management Institute curriculum advisory committee,” she said. “His commitment to continuing education for himself and his students is a model for other instructors.”
One potential lure for new talent, Walker said, has been the launch of new cutting-edge products, such as cyber liability coverage.
“Right now, we’re only just starting to scratch the surface and figure out the exposures and losses in areas like cyber liability,” he said. “And I believe progressive new products like that are going to be real areas of opportunity for growth for agencies going forward.”
However, one of the challenges for brokers outside of recruitment and retention, Walker said, is getting a handle on — and pricing accordingly — catastrophe losses, which have increased dramatically over the last 10 years to 15 years.
“I think we have got to be wary of the fact that often we tend to be over-sensitive on the pricing side of the business,” he said. “As an industry, I think we have really got to start looking at the credibility of our pricing and not react so much when we are somewhat profitable, but instead look at what we should be doing in a 10-year timeframe, rather than a three-to-five-year one.”
It’s also been a challenging time on the legislative front, Walker said, with brokers waiting anxiously to see whether the Terrorism Risk Insurance Act (TRIA) will be reauthorized by the end of this year.
“One of the main concerns from the agency and broker perspective,” he said, “particularly for license renewals on medium to larger-sized accounts that have happened since the start of this year, is that we don’t know what that reauthorization will actually look like.”
The IIABA is also keen to see the National Association of Registered Agents and Brokers Reform Act (NARAB II) enacted by Congress, said Walker. That law would provide a one-stop licensing system for agents operating outside of their home state, while maintaining state regulatory authority.
Walker was introduced to insurance broking in 1981 by his father-in-law Richard Bayer, following a brief stint at Guarantee Mutual Life. Bayer had just started his own agency, Hartland Insurance Agency, in Hartland, Mich., and was looking to get it off the ground.
Walker started as a personal lines producer, selling home and auto insurance and swiftly moved up the ranks to president and principal, eventually taking over from his father-in-law, who passed away in 1992.
“I thought I might go back to school to do an advanced degree, but decided to try insurance broking for a couple of years and I’m still experimenting with it 33 years later,” he said.
Today, the agency has four offices nationwide and 37 employees, and it’s still growing, according to Walker.
During the time it’s taken to build the business, Walker has seen some big changes, most notably the advent of technology.
“We no longer have IBM Selectric typewriters and carbon paper — now everything is completely digital,” he said. “Twenty years ago, we had a large filing cabinet room, but now pretty much everything is stored digitally.”
While his own company’s transition to digital has been relatively smooth, Walker said, some brokers are still struggling with technology, and in many cases they are playing catch-up.
“In the 1970s and ’80s, when you wanted to get Special Multi-Peril (SMP) quotes [the forerunner to today’s commercial policy], if you had 10 insurance companies, you had to fill out 10 different applications, submit them in the mail to those companies, wait for their responses and then negotiate the pricing with the underwriter, before going out and selling them the account,” he said.
“If you fast-forward to today, since the advent of ACORD (Association for Cooperative Operations Research and Development), we have got the same problem, except this time instead of, ‘How many SMP applications do you have to fill out?’ it’s, ‘How many websites do you have to go onto to get those quotes?’
“In that respect, we have probably gone a bit backwards.”
Walker, who specializes in commercial insurance, was elected to the IIABA executive committee in September 2009.
Madelyn Flannagan, vice president of agent development, research and education at the IIABA, said that Walker has been active in the organization as well as a business community leader at the state and national level.
“Nationally,” she said, “David Walker is a recognized educator and advocate of the independent agency system whose leadership extends to his participation in continuation education efforts and the classroom.”
Rusbuldt said, “I like to call him the professor because of the great teaching work he does and he’s also a highly sought after speaker, as well as being a very successful business owner in his own right.
“I have known David for almost 20 years now and I can honestly say that he has the perfect skill set to be the chairman of our association.”
Walker also represents the state of Michigan as a board director on the IIABA national board of directors and serves on the IIABA professional liability committee and the IIABA advantage board. Previous to his current role, he was vice-chairman of the IIABA in 2012.
In the meantime though, he’s got plenty on his plate at the IIABA.
For the next 12 months at least, he’ll be focused on the task at hand of helping agencies to secure their future leadership and to unearth the next generation of brokers.
Environmental Time Bomb
The cost of failing to safeguard a vacant building against environmental risks such as mold and Legionella can run into multimillions of dollars.
And with tens of thousands of vacant and abandoned office buildings, hotels and other properties across the United States, according to federal government estimates, experts believe a growing list of serious health hazards is a time bomb just waiting to explode.
But that’s only the tip of the iceberg. The biggest emerging threat on the horizon is the sudden proliferation of crystal methamphetamine production laboratories in empty urban buildings, fueled by an industry believed to be worth almost $30 billion globally.
“Environmental risk has traditionally been viewed as an area with low frequency/high severity impact; however, due to more stringent environmental regulations and our increasingly litigious society, frequency of claims are on the rise.”– John Wasilchuk, account executive for commercial insurance, Lockton
Environmental risk, as a whole, is big business in the United States, with a market of more than 40 insurers estimated to be worth $1 billion to $3 billion, which is set to grow exponentially over the next decade as a result of a surge in demand.
Vacant Building Problems
The difficulty mainly stems from a sharp rise in buildings that have become vacant as a result of tenants being unable to pay their leases, or hotels partially shutting down during the off-season to save on running costs.
Veronica Benzinger, chief broking officer at Aon Risk Solutions Environmental Services Group, said the problem is exacerbated by increased vandalism, fire, and theft, as well as squatters and the general dilapidation of the building resulting from a lack of care and attention.
“A lack of basic supervision, security and maintenance can contribute to the building quickly falling into disrepair and becoming uninhabitable,” she said.
Mold: The “No. 1” issue
Despite all of those issues, the No. 1 problem with vacant buildings remains mold, according to Richard Sheldon, environmental practice leader at Willis North America.
Once it finds the right conditions, he said, mold rapidly multiplies and spreads within 72 hours.
“The scale of the problem can be anywhere from a simple and relatively inexpensive remediation process to full scale clean-ups running into the tens of millions of dollars, when you factor in business interruption,” Sheldon said.
Benzinger said the worst form of growth is Stachybotrys Chartarum, known as black or toxic mold. It produces toxic compounds called myotoxins, which when released into the air are harmful when they come into contact with humans.
Although mold can affect all buildings, she said, it’s often worse in more modern properties where the air flow is restricted, creating greater potential for them to become breeding grounds for mold.
“The biggest problem is water intrusion,” she said. “Once that happens, mold can grow and proliferate throughout the building.
“Mold can affect any building, but it’s often worse in new buildings. All it needs to grow is the right temperature, moisture and food.”
Susan Doering, vice president and director of Tokio Marine Specialty Environmental, said: “The bottom line is that vacant buildings are prime real estate for mold growth — which can lead to loss of property value, potential harm to new inhabitants, and costs incurred to mitigate the problem.
Construction projects that are restarted after a period of dormancy can also face issues related to damaged building materials that were exposed to the elements while the project was abandoned.
“The most common issue faced in this scenario is damp building materials that will be enclosed in the building envelope, creating an environment that is perfect for mold growth,” Doering said.
Spread of Legionella
Letting a building fall into disrepair carries with it a multitude of health risks, including the Legionella bacteria, which causes Legionnaire’s disease. The bacteria can quickly develop and spread through the building’s heating, ventilation and air conditioning systems (HVAC) if they are poorly maintained, Benzinger said.
This is prevalent in hotels that close down some of their units in the winter months, she said.
“It’s particularly common in artificial water systems, fire sprinkler systems, and hot and cold water systems because the bacteria can survive at relatively low temperatures,” Benzinger said.
“So unless the system is properly maintained, when the next person moves in and they turn on the taps again, they can get a nasty shock.”
Or worse. If the bacteria makes contact with humans, it can become a potentially fatal form of pneumonia.
Sheldon of Willis said that, as a result of the potential threat it carries, Legionella has become one of the key areas of cover in environmental liability insurance in recent years.
“The issue has been around for quite some time now, but it hasn’t necessarily been covered in standard policies previously and has only really come to light recently, which goes to show that the level of concern about it has heightened,” he said.
“We have seen some big losses in the U.S. in the last couple of years, particularly in the hotel and hospitality trade, due to the spread of Legionella, which have resulted in payments of $10 million and upwards.”
Sheldon said the costs aren’t limited to the clean-up operation either.
He’s also seen some substantial bodily injury claims due to exposure to Legionella, which have resulted in large settlements being paid.
“Our estimates are that some of these losses are in the multimillion range,” he said.
Crystal Meth Production
Another fast growing problem, said Benzinger, is the proliferation of methamphetamine laboratories, where the drug can be quickly and cheaply manufactured using toxic substances such as drain cleaner and paint thinner.
Video: The illegal production of meth contaminates properties with hazardous chemicals and creates a strong risk of fire or explosion.
“These hazardous toxins can quickly spread to and contaminate the adjoining properties, putting the health of residents at risk as the fumes permeate into shared amenities such as air conditioning systems and are inhaled,” she said.
“Ultimately, it can kill your brain cells and also damage your lungs and other vital organs.”
Sheldon said the clean-up costs of the residual toxins produced by methamphetamine labs can be “catastrophic,” depending on the quantity and type of materials used in its production.
“It has to be handled very carefully and generally involves a full blown hazardous waste disposal team to handle the materials involved properly and safely,” he said.
On the whole, these types of environmental risks — and the litigation defense costs associated with them — are excluded from most general liability or property insurance policies, leaving property owners to defend themselves against lawsuits arising from the threat of contamination.
But, Sheldon said, there are tailored policies available that allow building owners to manage these risks while protecting their main assets.
“There are insurance policies available that extend beyond the traditional general liability cover and will provide you with a high level of cover for mold and Legionella clean-up, as well as the remediation of methamphetamine labs and their contents,” he said.
A number of industry organizations have launched new practices in recent years to provide cover for vacant and distressed properties, in response to this growing list of environmental problems.
With many abandoned buildings in inner cities being demolished and removed, contractors’ pollution liability insurance policies are also being put in place to protect workers against pollution claims brought against them, with cover limits starting from $500,000 and rising to more than $50 million.
Site pollution or pollution legal liability has also become more readily available, providing property owners with protection against third- and first-party claims — including defense costs — resulting from pollution conditions.
Variations of this policy include secured creditor environmental insurance and lender liability, which cover financial institutions and borrowers throughout the buying and selling process.
Risk Strategies Needed
Tokio Marine’s Doering said good property management is key to avoiding the build-up of mold and Legionella in the first place. HVAC systems need to be kept at a moderate temperature, and regular surveys to check for leaks, musty odors or mold growth should be carried out.
She added that water systems should also be flushed regularly and drained when not in use to reduce the likelihood of Legionella spreading.
John Wasilchuk, account executive for commercial insurance at Lockton, said having a sound environmental risk management strategy is paramount, particularly in the hospitality industry, where a clearly defined water management plan and a comprehensive pollution prevention plan are essential.
“Environmental risk has traditionally been viewed as an area with low frequency/high severity impact; however, due to more stringent environmental regulations and our increasingly litigious society, frequency of claims are on the rise,” he said.
Therefore it’s fundamental for businesses to have an effective strategy in place to mitigate against those risks and to make sure they are covered should the worst happen.