Ample capacity and competition have kept pricing soft in the U.S. errors and omissions liability market, although some observers see signs that rates are leveling off.

“We're definitely finding that there is more capacity chasing a typical deal than there is demand from that buyer,” said Sandy Codding, the Boston-based managing director and co-leader of the professional liability practice at broker Marsh Inc.

The E&O liability market typically lags the similar directors and officers liability market in claims experience, experts say. Lyle S. Hitt, New York-based executive vp of Arch Insurance Group's professional liability practice, said the E&O liability market still is in the early stages of working through credit crisis-related litigation.

As in the D&O liability market, a flood of new capacity has entered the E&O liability market, due to a period of favorable claims experience and the financial troubles of several large insurers in 2008, which sparked competition for their business. Those recent entrants have created surplus capacity, which has depressed rates as insurers compete for business.

Bruce Eisler, a New York-based senior vp at Liberty International Underwriters, said there are more than two dozen insurers offering E&O liability coverage in each sector other than financial institutions and medical malpractice. In 2001, there were less than a dozen, he said.

A Marsh report said total U.S. E&O capacity likely will remain at more than $450 million in 2010 and most buyers should be able to find the capacity they want. On average, E&O liability rates were flat to down 5% through the first three quarters of 2009 compared with decreases of 5% to 15% for the same period in 2008, according to the report.

While insurers compete to win business, price-conscious buyers have driven rates further downward.

Mr. Eisler said some policyholders are willing to forgo various services, such as specialized claims operations and risk management services, in exchange for lower prices. “Price (is) more of a determining factor than it has been in quite some time,” he said.

Lower pricing could cause problems for insurers, beyond just reducing premium income. Underwriters typically rate professional services firms based on their revenue, which in many cases has fallen significantly because of the financial crisis. But some underwriters say E&O exposure is based mostly on acts committed during previous years when firms enjoyed much higher revenues, so the coverage should be priced accordingly.

“As underwriters, we need to price for prior acts exposure,” Mr. Eisler said. “Some of the new carriers are coming in and saying we'll just rate it on your current or projected (revenues) and that's a short-term strategy. That's something that is not sustainable.”

But there are signs the market is moderating, some observers say.

“Our sense is that the rate reductions and some of the more aggressive (competition) are slowing down a bit,” said Paul Romano, Avon, Conn.-based president of OneBeacon Professional Insurance. “The environment is doing exactly what it does near the end of a soft market....It's open to question whether that will last another 12 or 18 months.”

Mr. Codding said he doubted the market would change significantly in 2010, given surplus supply, although he said rate decreases slowed in 2009.

Some sectors have experienced rate increases, such as large law, accounting and real estate firms. Underwriters report they have been walking away from accounts on which they cannot achieve the rating level they feel they need.

One area on which underwriters are increasingly focused is information security, Marsh said in its report.