As market conditions for professional liability insurance evolve, there’s a great deal you can do to position your firm for a more favorable renewal.
The AEC professional liability insurance market has been a buyers’ market for the last 10 years; one of the longest “soft” markets ever experienced for this niche line of coverage. Yet, there are signs the market has leveled off; for the most part, rates were not decreasing further as we worked through 2019 policy renewals. In fact, there are actually some potential signs of a slight increase in rates, in particular for design firms with higher risk profiles.
Many of today’s executive-level decision-makers at AEC firms haven’t experienced increasing rates, let alone a hard insurance market. Indeed, market forces have been driving down rates and competition has prompted insurers to offer lower deductibles and broader coverages; you don’t even have to ask for these enhancements!
However, just as you might prepare for a potential economic downturn, you should also be prepared for a change in the professional liability insurance market. An easy way to do that is to focus on factors you control that have measurable impact on the availability and cost of your professional liability (or E&O) insurance. This can best be accomplished by accurately completing your annual renewal application and by understanding how underwriters evaluate your firm.
While each carrier and their underwriters have their own unique way of evaluating and pricing risk, they all work within the same general guidelines. By knowing how your incumbent carrier factors in some of the following details, you’ll help minimize surprises at renewal and will gain a sense of what to expect by way of renewal terms.
The ability to accurately predict your renewal quote gives you and your partners a leg-up on budgeting for the renewal. It also helps bring context to renewal terms and the advantages and disadvantages of moving your coverage. Here are three key factors to keep in mind as you approach your firm’s professional liability insurance renewal:
- Know how your carrier calculates the renewal revenue base. Most but not all carriers draw on a three-year averaged revenue to calculate your ratable revenue base. However, there might be a significant swing in the average if the underwriter uses the past three years versus the past two years plus the projection for next year. A few carriers use just the most recently completed year as the only year in their calculation, while some use a five-year revenue average. It’s also important to know if your underwriter has the leeway to use a longer period of years in its calculation; that might draw in a fourth or fifth year with lower revenues that bring down the overall average.
- Know which service areas are viewed as higher risk. At the same time, be aware of the impact increasing or decreasing activities in specific disciplines of service might have on the renewal premium. A recent renewal offers a good example. The design firm provides architectural services, urban planning and design, and landscape architecture. Last year, 49 percent of the firm’s revenues came from architectural design; however, at this renewal that amount jumped to 59 percent. Architectural services are considered among the higher risk services and coverage may be priced at three to four times the rate of either urban planning/design or landscape architecture. The increase in architectural services increased the gross renewal rate by 10 percent for this firm. That translated into a premium increase of $15,000. In the abstract, this firm may have thought the premium increase was unjustified. Nonetheless, given the context, the firm chose to renew with the incumbent carrier (it also took the time to double-check the 59 percent amount and confirmed it was accurate).
- Know your firm’s loss experience. All carriers use at least a five-year loss window when evaluating whether they will consider even offering to quote your firm. Then, they use that same loss experience together with other underwriting factors to determine the specific terms of the quote. This is true whether you’ve been with the same carrier all five years or if you’ve been with the carrier only for part of that time. Insist on seeing your firm’s five-year loss runs (carrier issued summary of claims reported each policy year) at least once a year. The loss runs typically list the loss reserves for each file reported.
However, some carriers no longer list actual reserves on the loss runs they issue; so, ask your assigned claim contact with the carrier if they’ve established any reserves. Do not assume that if the carrier hasn’t informed you it has posted a reserve, you’re “free and clear;” many carriers aren’t proactive in keeping their insureds apprised of these “internal” decisions.
Losses incurred in excess of the applicable policy deductible trigger underwriting action; the underwriter will debit your account depending on the amount and frequency of these losses. This will potentially increase the proposed rate by double digits while potentially prompting an increase in the renewal policy’s per claim deductible. If you’re not aware of loss reserves by the carrier, this “corrective” action may come as a total surprise even though it may be justified given any losses.
That said, there is a benefit in having a long-term relationship with a carrier: the underwriter may have discretion to go beyond the five-year loss window as the guiding measure, stretching the loss window to your tenure with the carrier up to 10 years or more. If other years are loss free, your loss ratio (reserves – both posted and paid out – divided by premiums collected over the same period) will be lower. A recent example: a firm with a $250,000 loss was presented with only a 9 percent rate increase because the loss ratio for that firm over the 11 years of the insured-insurer relationship was still less than 50 percent. The five-year loss ratio was much worse and would have prompted a large rate increase.
As market conditions for professional liability insurance begin to evolve, there’s a great deal you can do to position your firm for a more favorable renewal. It starts with understanding how underwriters view and price risk. It also calls for taking stock of your firm, including reviewing its loss experience and recognizing how its project mix and services affect its overall risk profile.
Rob Hughes is senior vice president and partner at Ames & Gough. He can be reached at email@example.com.