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.
FDA Medical Device Guidance
The Food and Drug Administration has released “long-awaited” guidelines on the cyber security of medical devices.
Obviously, this is a concern for health and life insurers, but it is also relevant to other areas of coverage, such as automobile or any insurance that pays medical claims.
“There is no such thing as a threat-proof medical device,” said Suzanne Schwartz, director of emergency preparedness at the FDA’s Center for Devices and Radiological Health, in an article in “USA Today” on the release of the guidelines.
“…many device manufacturers and software vendors only learn of vulnerabilities in their products after said products have been hacked.”
“It is important for medical device manufacturers to remain vigilant about cyber-security and to appropriately protect patients from those risks.”
Important indeed. One would think that such statements would be followed by some specific safety requirements, or at least by substantive recommendations.
Instead, the article noted, “The agency is recommending that manufacturers consider cyber security risks as they design and develop medical devices.”
And which particular risks might those be? It seems there is again no specificity.
Once having “considered” those risks, however, the FDA says companies should give the FDA information about the potential risks they found, as well as what controls they put in place to mitigate them.
While this is a nice idea, it ignores certain realities in the world of technology development in general and cyber security in particular.
First, many device manufacturers and software vendors only learn of vulnerabilities in their products after said products have been hacked.
Yes, it would be fair to say that manufacturers and vendors should do a better job of testing in order to ferret out potential problems, but it is also fair to say that the number of ways to crack a product’s code are many and that not all of those ways are likely to be anticipated.
And at some point in the product development process, the testing phase must come to an end — unless the vendor is oblivious to the possibilities for profitably marketing a given product.
“Many devices are poorly secured and do not require a lot to hack. If there is sufficient incentive to do so, it will happen, causing harm to patients,” said Shel Sharma, director of product marketing for Cyphort, a threat-detection company, in the published piece.
But why would anyone want to hack into a medical device, implanted or otherwise? One obvious reason might indeed be to do harm to that individual. If an implant suddenly overheats and loses functionality, who is to say it wasn’t an accident, as opposed to attempted murder?
More ominous, however, is the idea that devices of various kinds must, by design, interface with broader medical systems that contain much more data — including confidential data on health and things like Social Security numbers. It might also be that a compromised device would provide a gateway to an entire enterprise, allowing for mischief and significant data loss, and the liability that would accompany same.
And liability is precisely the point for insurers of nearly any stripe. Of course, this whole risk scenario may represent a new area of insurance coverage to be marketed by our carriers.
Even in that case, however, insurers hardly want device makers to make things easy for criminals, because the carriers must then pay the claims. The FDA held a national workshop on medical devices and cyber security in October. Let’s hope the risks and the solutions that emerge from that gathering are more clearly defined.
Passion for the Prize
In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.
Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.
While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.
The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.
But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.
Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.
For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.
Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.
Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.
Risk in Motion
Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.
One of those changes is in the area of commercial auto and related coverages.
Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.
The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy
For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.
Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.
In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.
That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.
Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.
When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.
For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.
Those are two different distinct coverages, both of which a lease holder needs.
Matt Waters discusses the need for stand-alone environmental coverage.
The Energy Cycle
Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.
While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.
Matt Waters discusses future growth for midstream oil and gas companies.
In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.
Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.
Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.
Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.
Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.
For Waters, politics and the trends of the moment have little place in his long-term thinking.
“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.
And that holds true for the latest extraction technologies.
“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.
To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at email@example.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.