PLI Market 2015: Most Insurers Seek Stable Rates Amid Competition

PLI Market 2015: Most Insurers Seek Stable Rates Amid Competition Ames & Gough Architects & Engineers Professional Liability Insurance Market Survey I. Introduction & Overview Professional liability insurers for architects and engineers again achieved moderate premium rate increases in 2014. This comes on top of consecutive years (2012 and 2013) of rate increases, which in turn followed an extended cycle of softening premium rates. Looking ahead to 2015, insurers appear to have elevated concerns about competition as they strive to maintain rate stability and adhere to sound underwriting practices. 2014 also saw a continuation of overall premium growth for most A/E professional liability insurance underwriters, driven by the continued recovery in the U.S. economy, new business, and modest rate increases. Claim activity also appears to have leveled off, helping enhance the profitability of this line of business for underwriters. Even against this backdrop of increased exposures, modest rate increases, and a benign claims environment, some insurers saw profits wane in 2014. Many pointed to an over-abundance of capacity, lackluster investment performance, and in some lines, deteriorating underwriting results, as the reasons for this decline in financial performance. Given these dynamics, insurers remain especially cautious in their underwriting practices. Notably, with respect to their professional liability business, they are examining recent and historic claims experience and carefully assessing changes in risk profiles and participation in high-risk projects. Washington, D.C. (headquarters) 8300 Greensboro Drive Suite 980 McLean, Virginia 22102-3616 Phone: (703) 827-2277 Fax: (703) 827-2279 Boston 859 Willard Street Suite 320 Quincy, Massachusetts 02169-7469 Phone: (617) 328-6555 Fax: (617) 328-6888 In the Ames & Gough 2015 Architects & Engineers Professional Liability Insurance Market Survey, we examine key pricing and coverage trends, and offer perspectives to help design firms manage their professional liability exposure, which continues to be among their most significant risks. We recently surveyed senior underwriting executives responsible for the architects and engineers professional liability insurance lines at 14 of the leading insurance companies providing this coverage. This is the fifth consecutive year we have conducted this study. The insurers that participated in the 2015 survey were: ACE, AIG (Lexington), Arch, AXIS, Beazley, Catlin, CNA, Hanover, Liberty (LIU), Markel, One Beacon, PUA, RLI, and Travelers. They account for over 75 percent of the overall market for architects and engineers professional liability insurance in the U.S. We are grateful for their participation in our study and are pleased to present the findings in this report. This year, we also asked insurers offering property/casualty coverage for A/E firms to provide their insights on related trends. We have summarized responses received from three insurers in an addendum to the report. Philadelphia 1781 Hunters Circle West Chester, Pennsylvania 19380-6643 Phone: (610) 547-0663 Fax: (703) 827-2279 1

II. Survey Findings What Happened in 2014? New business, larger exposures, and higher rates drove premium growth Insurers saw premiums grow: In terms of premium collected, most of the insurers (79 percent) in the survey saw their professional liability insurance business grow in 2014. At the same time, 14 percent indicated their premium levels shrank and one insurer reported flat premiums. All the insurers that experienced an increase in premium attributed the growth to new business and most (82 percent) also pointed to clients renewing with increased exposures as architects and engineers benefited from the economic rebound. Meanwhile, 27 percent cited higher premium rates in some instances, tied to accounts with higher-risk projects. At the same time, the insurance market remains competitive: insurers whose business shrank in 2014 cited a loss of clients to competitors. Premium rates increased slightly in 2014, even as claim experience improved or stayed flat: The majority of insurers (64 percent) increased professional liability insurance rates modestly in 2014; 29 percent generally saw rates remain at previous levels and one insurer lowered its rates. Notably, the magnitude of the rate increases achieved in 2014 was significantly lower than insurer expectations at the start of that year (as reported in A&G s 2014 survey). Among the insurers increasing rates in 2014, 44 percent had actual increases of 3 5 percent, versus 56 percent of insurers expecting such increases at the start of 2014. Meanwhile, 44 percent had increases of up to 2 percent (versus 22 percent expected). Only one insurer in the survey achieved increases of 6 10 percent, compared with 22 percent anticipating such rate hikes at the beginning of the year. Claim Experience improves: Thirty-six percent of insurers saw their claim experience improve in 2014 compared to prior years, while 64 percent reported no change in their overall claims experience. INSURER PREMIUM RATE ADJUSTMENTS IN 2014 (Expected 1 versus Actual 2 for Insurers Raising Rates) Size of Increase Increase of 6 10% or more Increase of 3 5% Expected Increase of 0 2% Actual 0% 20% 40% 60% 80% 100% Notes: 1. Expected rate action based on A&G s 2014 survey results of those expecting to increase rates (nine insurers). 2. Actual findings based on A&G s 2015 survey results of those reporting increased rates (nine insurers). 2

What s Behind 2015 PLI Rate Actions? Rate inadequacy, claims still factors in 2015 rate decisions What s behind the drive for marginally higher professional liability insurance premium rates? Among insurers planning rate increases, half indicated rates had been inadequate, primarily as a result of multiple years of premium reductions prior to 2012. Even though most insurers did achieve modest rate increases from 2012 2014, rates for coverage generally still haven t recovered from multiple years of declines that occurred during the extended soft cycle that ran through 2011. After rate inadequacy, historic claim experience (losses going back more than two years) was the second biggest factor driving increases, cited by 25 percent of those planning to raise rates, followed by recent loss experience (last two years), inflation, underwriting criteria, and the need to maintain premium levels above current and anticipated loss trends each of which was cited by one insurer. When asked about recent claim patterns they have been watching, 43 percent of the insurers cited higher claim severity, but only 7 percent saw an increase in claim frequency. In fact, claims frequency continues to trend downward with 21 percent of the insurers reported seeing fewer claims overall. Nonetheless, while overall frequency is down, some areas continue to be the source of greater numbers of claims. For instance, among those surveyed, 43 percent identified certain project types, such as condominiums, schools, waste-water treatment, and data centers as causing more claims. In addition, 36 percent cited increased defense costs as an emerging cost driver for claims. Although cyber-crime and related incidents have led to substantial losses in other industries, the experience to date has been quite different with respect to A/E professional liability insurance. When asked about network security and cyberrelated claims, only two insurers indicated having paid such claims with one noting the loss stemmed from a stolen laptop. FACTORS DRIVING PROFESSIONAL LIABILITY RATE HIKES Rate inadequacy (due to multiple years of premium reductions) Historic claim experience (more than two years ago) Recent and anticipated losses/claims Inflation Underwriting criteria Current and anticipated loss trends 0% 25% 50% 75% 100% 3 Note: Insurers provided multiple answers, so the responses sum to over 100%.

With respect to claim severity, insurers were asked to provide the dollar amount of their largest single claim payment in 2014. The majority (71 percent) paid a claim of $1 million or more in 2014, including 14 percent that reported their largest claim was between $10 million and $19 million. In the face of escalating claim severity, A/E firms renewing professional liability coverage should carefully consider increasing their limits. What Can We Expect in 2015? 2015 Professional Liability Insurance Rates modulate As they strive to maintain or improve profitability, many insurance company executives will continue to hold the line on rates or seek modest premium rate increases in 2015. They consider this discipline necessary to offset the continued low interest rate environment and recover from the premium rate declines of past years. This will lead to many underwriters maintaining a rigorous underwriting regimen for renewals while at the same time working actively to grow top-line premium through new business. Countering this push for increased premium rates and underwriting discipline is the reality that capital continues to flow into insurance and reinsurance. Institutional investors seeking safe havens for their money still see opportunities in insurance and reinsurance. This expansion of capital seeking to write insurance or reinsurance will help stabilize the market and limit any wild swings in rates. For 2015, these developments likely will mean insureds with no changes to their risk profiles, positive claim experience and growing revenues are likely to see only modest premium rate increases in the 2-5 percent range on renewal. Some insurers may actually offer lower premiums to win a new client; however, insureds need to be careful to weigh the value of long-term relationships, positive coverage enhancements, risk management and claims service before jumping from insurer to insurer. As we ve seen over the last few years, we would again expect more competition for smaller firms (which many insurers see as less risky and more profitable) than for larger ones. Nonetheless, with respect to their overall business, eight of the 14 insurers participating in this year s survey expect to obtain professional liability rate increases during 2015; the remaining six see their rates remaining flat. Among those insurers surveyed that are planning to seek increases in rates, 87 percent expect rates to go up by 5 percent or less. EXPECTED 2015 PERCENTAGE INCREASES FOR INSURERS RAISING RATES Increase of 6-10% or more Increase of 3-5% Increase of 0-2% 0% 25% 50% 75% 100% 4

A&G Guidance: We continue to advise clients to seek stable insurer partnerships wherever possible. Experience has shown that building a track record with one insurer can be invaluable in addressing unique coverage needs or complex claims issues. Having said that, A/E firms should consider evaluating quotes from competing insurers every 3-4 years. In comparing insurers, buyers should consider not only the financial strength of the potential replacement insurer but also check out whether or not the policy terms and conditions offered provide the same or broader protection and the quality of the claim and risk management services available. Will the new insurer be able to maintain reasonable pricing over multiple years? Finally, keep in mind relationships generally have proven valuable to buyers in a tightening insurance market. How Do Insurers Set Premiums For Individual A/E Firms? Insurers sharpen focus on high-risk projects, claims experience From the insurers perspective, rate changes for an individual account may be driven by a number of different factors. Notably, type of project and claims experience including both recent claims and historic loss experience are among the most significant considerations by underwriters. With respect to projects raising the biggest concerns, insurers specifically cited schools, water works, and condominiums as having the highest risks from an underwriting perspective. Interestingly, while some underwriters in the past cited the overall need for a higher rate as a driver for increases on individual accounts, none did so this year. This further confirms the overall flattening of the professional liability market as noted above. A&G Insight: It is worth noting that underwriters continue to examine several factors in determining premium rates for an insured. In addition to overall revenues (keep in mind that decreasing revenues can lead to so-called diseconomies of scale Underwriting Factor KEY UNDERWRITING CONSIDERATIONS (2015 vs. four prior years) Type of Project Recent Claims Experience Type of Work/Service Historic Loss Experience Overall need for higher rate Quality of Firm s Leadership/Governance Evaluation of Risk Management Program 2015 2014 2013 2012 2011 Client Profile 5 0% 25% 50% 75% 100% Note: Insurers provided multiple answers, so the responses sum to over 100%.

and higher premium rates), underwriters will look at type of project, historic loss experience, recent claims, and type of work/service. Collectively, these comprise an insured s overall risk profile. Other Key Findings: Insurers Watch New Exposures, Keep Capacity Stable, Focus on Service Underwriters monitor emerging issues: When asked about prominent issues from an underwriting perspective, 43 percent of the insurers cited new construction materials/methods. Increase in design-build and public-private partnerships, each were cited by 36 percent of the insurers surveyed and 29 percent cited use of BIM and technology. Other issues getting the attention of underwriters include: sustainable design; integrated project delivery; rise in condo projects; sophistication of owners and plaintiffs (including changing judicial interpretation of laws that find coverage for plaintiffs), and performing services outside of disciplines or projects outside of traditional services. Stable capacity: Capacity for A/E PLI coverage remains stable. As in the past, the amount of available insurance limits varied by insurer. Four of the insurers surveyed will provide limits of up to $5 million. Six will provide up to $10 million in limits; two will provide up to $15 million, and two will provide up to $25 million in limits for A&E professional liability coverage to qualified firms. Meanwhile, significant capacity (in the form of excess professional liability insurance) remains available to address the needs of even the largest design firms. When higher limits are required, many underwriters will participate in various excess layers of a larger program even as they maintain their capacity restrictions on any individual risk. ABOUT AMES & GOUGH With more than 1,000 architects, engineering firms, and other construction professionals of all sizes as clients, Ames & Gough is the leading insurance brokerage and risk consulting firm serving the needs of these professionals. Ames & Gough also has established itself as a committed, superior resource for law firms and associations and non-profit organizations in need of professional liability, management liability, and property/ casualty insurance and risk management assistance. Established in 1992, the firm has offices in Boston, MA; Philadelphia, PA, and Washington, DC. 2015 Ames & Gough. All Rights Reserved. 6 Insurers emphasize claims service: As they seek to retain clients and develop new business, each of the leading insurers with dedicated departments for architects and engineers professional liability insurance coverage looks for ways to differentiate itself from the competition. Among the differentiators most often identified by insurers in the current study were: claims service, cited by 79 percent of the insurers; longevity/stability/commitment (50 percent); risk management support (43 percent); and breadth of coverage (43 percent). Other differentiators mentioned by multiple insurers included: one-stop shopping/ability to offer both PLI and other P/C insurance lines (25 percent); availability of project-specific policies and international capabilities. III. Closing Commentary: Insurers Approach Renewals with Greater Discipline as Rates Remain Relatively Benign While premium rates have begun to level off in 2015 following three consecutive years of increases, design firms and other construction professionals need to recognize that underwriters face imperatives to carefully assess professional liability risks and all other lines with increasing scrutiny. Given the fact that liability exposures are long-tail risks, insurers are monitoring trends carefully to determine what factors might impact their overall claims costs in the future. Notably, they are watchful of rising legal defense costs, as well as emerging exposures associated with new construction materials and methods, BIM, design-build, and the growing number of private-public partnerships. In this environment, A/E firms committing to active risk management through a focus on client selection and good contract hygiene, effective project management, and proactive client communications can continue to positively impact insurance costs. It also helps to present a comprehensive and truthful renewal application and submission to the insurance marketplace and work with a specialty broker who knows this coverage and has relationships with the key insurers serving this market niche. Finally, firms must be committed to addressing potential claim circumstances promptly as well as practicing active claims management.

Addendum: Insurers Share Perspectives on Property/Casualty Coverages Three of the insurers participating in the PLI survey also agreed to share their perspectives on developments with respect to their property and casualty (P/C) lines for A/E firms. Here are some key trends they revealed in their responses: Insurers saw flat premiums or modest rate increases on their P/C renewals in 2014. Two insurers reported their P/C premium rates overall were flat; one indicated they generally increased by up to 4 percent. In many property and casualty lines, the abundance of capacity in the marketplace is certainly a major factor mitigating rate increases with competition also playing a role. Meanwhile, shrinking profits and deteriorating underwriting results in some lines (e.g., worker s compensation, non-owned auto, or private company D&O) are putting upward pressure on rates. Insurers differ on 2015 rate expectations. In 2015, one insurer expects to raise rates by up to 4 percent; one sees rates staying flat, and the third believes rates will decrease by up to 4 percent. Of course, there are several dynamics that can affect specific accounts. They include: specific lines of coverage purchased, limits required and structure of the coverages; the insured s loss experience and, in some cases, the volume of premium placed with the specific insurer. In addition, geographic areas in which insured firms operate might reflect different trends in state workers compensation costs and premium rates. Firms operating in areas with the potential for natural catastrophe risks might see differences in property insurance renewals. Commercial auto losses, equipment theft, and workers compensation draw attention. When asked about specific coverage lines, all three insurers singled out commercial auto as a line requiring significant rate action (meaning rate increases). Notably, with a rapid rise in loss costs, the insurance industry s loss ratio for this line reportedly now exceeds 110, which equates to $1.10 in claim costs for every $1.00 in premium collected. In addition to higher premium rates, this will likely signal a need for more rigorous underwriting practices among insurers most affected by this trend. This is particularly problematic when it comes to non-owned auto coverage (i.e., where employees may drive their own vehicles on company business). Some insurers are asking for employers to confirm that such drivers have their own personal auto insurance, a valid driver license and few or no moving violations. Meanwhile, insurers also indicate they are seeing an increase in equipment theft and are monitoring workers compensation developments in several states. Insurers offer enhanced coverage for cyber-risk, drones, and employment practices. With widespread attention on technology, network security and cyber-risk, insurers stated they are planning coverage enhancements for this widening exposure. Those not already providing coverage for drones are evaluating what to do and seem to be planning on offering coverage at some point in the future. One insurer indicated it plans to offer coverage enhancements to its employment practices liability insurance. A&G Insight: The property/casualty insurance market for architects and engineers is expected to remain stable in 2015. That stated, some lines of coverage may see larger than expected increases, including business auto and workers compensation in certain states. Firm leaders should continue to remain vigilant about risk management and also ensure that they can provide a comprehensive insurance submission/application for renewal. 7