The insurance industry is experiencing the tail end of a prolonged soft market.
Insurance has always been supply driven, and as surplus goes up, rates come down. Professional liability for design professionals has been no exception.
Competition between insurance carriers 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:
1. Provide broader coverage
2. Provide superior claims handling
3. Provide exceptional risk control
4. Provide a lower price
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 generally 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.
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.
1. Although price is extremely important, especially in tough economic times, you are buying insurance to protect your company if you have a claim. As mentioned above, the quality of some of the new players leaves much to be desired...who do you want protecting the financial future of your company? An experienced claims adjuster, or some random claims adjuster who can't spell "architect" or "engineer"?
2. If a company does exit a line of business or goes out of business, the quality of the personnel dealing with your existing claims is going to drop off drastically.
3. Finally, we are heading into a hard insurance market. Coverage is going to be more expensive and more difficult to get. Companies that abandon their "preferred markets" will be closely underwritten and may not be welcomed back with open arms.
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.