A leveling-out of systemic issues that once racked up Professional Liability claims has ushered in a new area of stability in the market. But that stability doesn't mean things aren't exciting in this space, as carriers continue to evolve with the ever-increasing need to weave Cyber coverage into policies.
Additionally, the stabilization of losses has created a competitive atmosphere for capacity and pricing, with new players entering the arena and existing carriers expanding to write coverage for professional segments they previously didn't cover. The future of Professional Liability is dynamic, executives say, and carriers are enthusiastically trying to keep up.
Issues that were claims drivers in the Professional Liability insurance market in recent years have more or less abated, according to Gary Mann, Errors & Omissions (E&O) practice group leader for financial lines at Allianz Global Corporate & Specialty (AGCS). He notes that the U.S. has mostly recovered after the housing and stock market bubble bursts, the financial crisis and the Great Recession (“depending on who you talk to,” he notes), and explains that the change in those exposures has helped put the market on a more even keel.
“The interesting thing is that compared to more recent years, the marketplace right now is stable,” says Mann. “What we’re seeing right now is — I’ll dare say — a normalized state for the marketplace, meaning there's no overall systemic issue that's affecting one particular segment or more.”
According to David Egosi, senior vice president and head of professional risks at Hiscox USA, those recoveries have aided profitability in segments that typically produced small margins. “A period of economic recovery has also padded performance within historically marginal Professional Liability segments such as architects & engineers, real estate, lawyers and accountants E&O,” he says.
Matt Probolus, E&O portfolio manager at Travelers, adds that while the types of claims in the Professional Liability space are “still the same,” frequency is indeed on the decline. “It hasn't returned to pre-recessionary levels, but claims are at lower levels than we have seen in recent years,” he adds. “There are segments best described as experiencing stable pricing, with some downward pressure depending on the industry. I think that's a reflection of the overall market competition, and some feeling good about their results right now.”
Evolving with Cyber
Yet all is not calm in this space. The infiltration of cyber exposures into nearly every segment of Professional Liability is a growing concern among insurers. “The one area in which we are seeing new losses hitting professional firms is claims involving nontraditional loss sources, such as cyber phishing incidents,” says Probolus. “Those are costing significant sums of money.”
Maintaining the privacy rights of clients, data collection, and security are growing issues that all professional service providers are facing, adds Mike Muglia, senior underwriter at Burns & Wilcox. “Some of the biggest claim drivers are coming from negligent cyber security and data protection practices,” he says. “We have seen fraudulent wire transfers, data breaches and security-related claims pushed to Professional Liability policies under the banner of negligent professional services, and that was never the intent of the policy.”
“More and more of professionals’ jobs involve technology, and as a result more and more products are being merged with cyber coverages as either supplemental, or as blended into the coverage,” Mann explains. “The evolving trend, if you will, is the further integration of technology into professional services that would then lead to the marketplace itself evolving the products to include Cyber coverages.”
Adds Egosi, “Emerging and evolving exposures such as cyber and technology could drive market-wide losses as these coverages take shape at breakneck speed and carriers leverage these untested expansions to maintain and grow their core E&O portfolios.”
Matthew C. Kramer, senior vice president, Professional Liability, Arch Insurance Group, says there is no question that the biggest exposures in the market are cyber-related: “The cyber exposures continue to change at a rapid pace. This is a global issue and won't be going away, as evidenced by recent malware attacks such as WannaCry.”
“The economic impact last year of cyber-related threats are estimated to be north of $400 billion,” he adds. “As threats become more sophisticated and prevalent, the economic losses will escalate, as will the losses for insurance carriers. The biggest claim-drivers at this point are the cyber-related first-party losses that companies may experience when they are victims of a cyber event.”
Cyber exposures go beyond targeted attacks, however. According to Kramer, simple employee errors can cause losses, and the risks in those types of situations can be just as serious.
Despite the growing concern over cyber-related losses, the overall lower claims and stable pricing are helping shape the Professional Liability marketplace into a competitive one for carriers. For traditional E&O accounts, there are segments within the diverse professional segments themselves that help generate competition and variations in pricing and carrier appetite, says Kramer.
“For example, competition for a real estate account can be quite different than the market for insurance agents where there is plenty of capacity and broadening of terms and conditions,” he notes. Furthermore, a similarly situated account may see different levels of pricing and competition depending on the state of domicile.
“We’re seeing pricing changes as more account-specific now,” says Mann. “Gone are the days — thank goodness — when we would see an account get a 20% discount at renewal even though it has claims.”
Muglia says Professional Lines is “extremely competitive” from a capacity standpoint as well. “There is no shortage of options for nearly any miscellaneous or technology professional,” he explains. Renewal rates are typically holding flat as these segments of business have performed very well for carriers and remain profitable.
“There is more capital than ever, with more carriers joining the fray every year,” adds David Lewison, senior vice president, Professional Lines national practice leader with AmWINS Group Inc.
“We’re seeing competitors increasing their appetite as well,” says Mann. “They’re expanding the lines they’re writing, like architects & engineers, agents E&O — where they normally wouldn't have in the past.”
Technology Shapes a Dynamic Market
Cyber exposures, the use of data analytics and the adoption of InsurTech are poised to keep insurers on their toes as they look into the future of the Professional Liability market.
“Next year and in coming years, we think the Cyber market will continue to grow exponentially in terms of breadth of coverage as well as availability of the product,” says Kramer. “It is estimated that the current global Cyber marketplace is roughly $3 billion in premiums written, with growth expectations of greater than $7 billion in the next three to five years. That presents a significant opportunity for the marketplace to provide solutions for our clients.”
Similarly, Lewison notes how a potential — some may even say probable — cyber business interruption claim from a cloud provider would be … interesting.
“There are over 70 cyber markets and the same insurers are in D&O and E&O,” he says. “That could suck out capacity and make things challenging.”
On the horizon, Egosi sees the use of InsurTech having the potential to play a large role in the Professional Liability space. “Buying behaviors and traditional insurance models will continue to be tested as InsurTech solutions become more commonplace,” he says. “Next year we can see material movement within the small commercial sector as the market evolves from commercially led solutions to cost of product- and technology-led solutions.”
With the continued influence of evolving technology, Muglia stresses the importance of maintaining accuracy in the underwriting process. “While emerging technologies will help the process, brokers need to understand that the quickest solution is not always the right one,” he says. “This is why the value of relationships will grow even stronger as the industry endures technological advances, and specialty partners will continue to play a key role for brokers and agents.”
From the carrier side, Probolus emphasizes getting the most out of the technology available today and to come: “The use of analytics has become a huge differentiator between carriers and a competitive advantage not only with the carriers, but also in partnering with brokers,” he explains. “The ability to read and analyze data has potential for the early adopter industry leaders to become more targeted, efficient and stable in terms of pricing and predictable profitability.”
With so much potential change and increased opportunities — as well as challenges — coming Professional Liability's way, Kramer says the ideal word to describe the current state of the market is “dynamic.”
“There's no other way to describe what's currently happening,” adds Kramer. “It's an exciting time to be a part of the Professional Lines marketplace.”