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.
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at firstname.lastname@example.org.
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.