Rate softening accelerates across E&O liability market

As many professional risks renew their errors and omissions liability coverage at expiring to 10% lower rates, and evidence suggests an accelerated softening is underway, a growing number of underwriters also are covering privacy breach claims, market executives say.

Even the medical malpractice market is softer, though rates and capacity have not improved anywhere close to their levels earlier this decade, before the market tightened severely.

Market executives differ on how they would characterize the E&O market, however.

Some, including Jeff Grange, a senior vp and worldwide professional liability manager at Warren, N.J.-based Chubb Corp., describe the market as stable and in a period of equilibrium.

Others, including Kevin Kalinich, a Chicago-based national managing director of Professional Risk Solutions at Aon Corp., say the market, with some exceptions, is "extremely competitive."

Midsize companies, or those with up to $1 billion of revenue annually, and business-to-business enterprises are faring much better than larger companies and those with business-to-consumer operations, Mr. Kalinich said.

Sandy Codding, a managing director with Marsh Inc. of New York, has seen the market softening at an accelerated pace—except for lawyers—over the past couple of months. But he said he is unsure whether the rate reductions of 15% to 20% are the result of insurers only temporarily lowering rates to try to meet their 2006 written premium goals.

If the softening is a longer term trend, "we'll know by the end of the first quarter," he said.

For financial institutions, the absence of revelations of systemic problems in 2006 was "good news," Mr. Grange said. The "positive effect" for that industry is ample capacity at renewal and stable rates, he said.

Indeed, smaller financial institutions that are not money center banks "see a pricing environment that's softening up a little bit," Mr. Grange said.

The lawyers E&O market segment is improving for some buyers but not for large firms in certain practices, according to market experts.

Mr. Codding said rates are flat to 5% lower and capacity is stable.

Rate decreases are somewhat greater, though "not sizeable," for lawyers' excess E&O coverage because of new capacity from the Bermuda market, said Bruce Eisler, a New York-based senior vp with Liberty International Underwriters, a unit of Liberty Mutual Group Inc.

But for firms with more than 100 attorneys and that have mergers and acquisitions, financial institution, intellectual property and tax practices, capacity is tighter and insurers are seeking rate increases, Mr. Grange said.

Rates are softening for architects and engineers because of "a pretty dramatic increase" in capacity, Mr. Eisler said. With existing markets offering additional capacity and London underwriters opening U.S. operations, capacity has grown "upwards of 30%," he said.

In the medical malpractice market, hospitals continue to see some relief from the tight market conditions that severely constricted capacity and ballooned rates for years before 2006, according to Max Palmer, a New York-based managing director with Marsh.

"Abundant excess capacity" written by up to 20 U.S., Bermuda and London market companies is available for hospital risks, which often finance their first layer of coverage through a captive, Mr. Palmer said. While most large hospitals purchase between $50 million and $150 million of coverage, up to $500 million of capacity is available, he said.

Rates on average are 10% lower, though hospitals in "some good jurisdictions" can negotiate greater reductions and risks in some "bad jurisdictions" face rate hikes, he said.

Rates, however, continue to remain far higher than they were five or six year ago, Mr. Palmer noted. Risk managers today are paying for $25 million to $50 million of limits what they paid for $50 million to $75 million of coverage before the hard market, he said.

Another important aspect of the stable to somewhat softer E&O market is the growing willingness of underwriters to cover losses stemming from a risk's inability to safeguard the privacy of its customers' and clients' personal data, market experts note.

Risk managers could purchase up to $100 million of coverage, but they typically are purchasing between $10 million and $50 million of limits, Marsh's Mr. Codding said.

Risk managers can purchase the coverage through either an E&O policy endorsement or a stand-alone policy, Chubb's Mr. Grange noted. But, the stand-alone coverage typically provides "more robust solutions," he said.

Some insurers will not offer the privacy coverage, however, because of reinsurance restrictions, Aon's Mr. Kalinich noted. Those insurers are losing accounts because of their inability to provide the coverage, he said.