by Jeffrey Cavignac, CPCU, ARM, RPLU, CRIS, MLIS – President, Cavignac & Associates
|The insurance industry is experiencing the tail end of a prolonged soft market. Rates for most businesses have been coming down since 2002/2003, due mainly to excess capacity in the industry. Insurance has always been supply driven, and as surplus goes up, rates come down. Professional Liability for design professionals has been no exception. Competition for architects and engineers Professional Liability is as intense as it has ever been. Seven to eight years ago, there were at most 10 companies competing for this business; today there are over 40. In order for an insurance company to develop an ongoing presence in this business, they need to establish market share. There are only four ways to do this:
The policies offered by experienced underwriters are as broad as they have ever been, it is difficult if not impossible for a new company to provide a significantly broader policy form. In addition most new entrants don’t have the volume to justify in house, experienced, specialized claims adjusters. As such they have to sub out their claims to Third Party Administrators (TPA’s). While some TPA’s are qualified, many are not experienced with the design profession. Similarly, new companies have not had the time to develop risk management programs, or are not inclined to. This is a reflection of the fact that Risk Management takes a substantial commitment of time, money and expertise.
So if you can’t compete on 1,2 or 3…that leaves price. This is exactly what some of the new players are doing. They are pricing their coverage 20-25% below the experienced underwriters. Unfortunately, they are not underwriting 20-25% better. It is only a matter of time before the losses catch up with the premiums. Unfortunately since Professional Liability is a long-tail business (claims are not usually paid until years after the premiums have been accepted) it can take a long time before a company realizes they have underpriced their product.
But why wouldn’t a design professional switch to one of these “newbies” to save some money? After all, they can just switch back if these companies withdraw from the market. Unfortunately that is not always the case.
Many of these “new” companies will not be around long, so it is prudent to evaluate a prospective insurer on factors besides price, such as their commitment and experience in the industry, claims handling abilities and risk management offerings. You should also consider the qualifications of the broker you deal with. An experienced broker who specializes in the design profession can work with you to lower the frequency and severity of the claims that ultimately drive your premium costs.