Shrinking Limits and Expanded Premiums in Professional Lines Insurance? Hold On, Things Aren’t as Bad as You Think

A wave of employment practices liability lawsuits, spurred by the complexities of the pandemic, is likely to exacerbate an already difficult market for the placement of professional liability insurance.

By: John Hintze | June 3, 2021

Agents faced a difficult management and professional liability (MPL) market even before the arrival of COVID-19, which exacerbated already shrinking limits and rising premiums.

In its “2021 U.S. Property Market Outlook” report, Risk Placement Services (RPS) sees some areas improving, or at least not worsening, as long as the pandemic continues to recede and the economy recover.

The distributor of specialty insurance products is blunt about the impact of COVID-19, noting the elevated number of corporate bankruptcies and class action lawsuits, including allegations that companies misrepresented their products’ safety and inadequately disclosed the pandemic’s impact on their businesses.

In addition, a wave of employment practice liability (EPL) claims related to pandemic furloughs and management’s back-to-the-office decisions are expected.

“As a result, EPL carriers have been pushing for higher rates and retentions with some adding COVID-19/pandemic-related exclusions,” the report said.

Remote Work Increases Cyber Risk

The pandemic also enabled cyber criminals to exploit network vulnerabilities when employees work remotely, resulting in a first-time hardening of that market, “with carriers laser-focused on managing ransomware and social engineering exposures,” according RPS.

Manny Cho, executive vice president at RPS, noted the uniqueness of today’s market, driven by pandemic-related factors and also market factors that had resulted in MPL markets hardening.

Manny Cho, executive vice president, RPS

“Often we’ll see a line or category of business that might be firmer than others at any given time, but this is the first time I can recall when just about every line of business we touch is firming in the marketplace in terms of rate increases, changes in retention, capacity changes, and changes to terms and conditions,” Cho said.

“It really has hit across the board.”

Insured clients are thus getting hit from every angle, Cho said, adding that agents need to set the proper expectations for customers, and teams must work to figure out how to move accounts from the middle or bottom of carriers’ submissions stack to the top.

“Because if carriers have limited capacity to deploy, you want to make sure they look at your customer, your insured, as an account where they want to make their bet for the year,” Cho said.

That means discussing with clients the best information to provide to carriers, such as financials that include their growth and reopening plans following COVID-related shutdowns and how their risk will be different in 2021. Elements, Cho said, where clients may not have spent much time, or previously received follow up questions from carriers.

Increasing Your Cyber Defenses

In terms of cyber security, the increase in ransomware events highlights the risk of cyber attacks that’s been elevated by employees working from home.

Cho said many carriers are using third parties or proprietary technology to do scans of insured clients’ cyber defenses and discovered, for example, that open remote desktop protocol (RDP) ports are an entryway into systems for such attacks.

“Carriers want to know what resources organizations have to manage that,” Cho said, adding that RPS is reviewing applications, noting discrepancies and then going back to get more clarification, so clients hit all the carriers’ checkmarks. “It’s really making sure they’re seen in the best light, so they can get the best terms.”

Cho said that last year when RPS clients shut down due to the pandemic, carriers wanted to know their plans, including how they were going about shutting down, and whether employees were being furloughed or laid off permanently. Then similar inquiries were made when the companies reopened last summer, and again when they closed in the fall.

“Now that organizations are slowly reopening again, carriers want to know what steps they’re taking, their hiring practices, and so on,” Cho said.

Markets Are Stabilizing

The outlook for specific policy lines varies, but most appear to be stabilizing — or at least hardening at a slower pace.

Directors and officers (D&O) liability insurance, for example, is “stabilizing” for mature companies, according to the RPS 2021 Management & Professional Liability Market Outlook.

This means rates are increasing less although it remains a harder market, Cho said, adding new capacity is entering the market but competitors are currently not seeking to undercut one another.

The D&O market for companies going public remains challenging, especially for special purpose acquisition companies (SPACs), which offer a route to the public market through already listed shell companies. Cho said the big question is what long-term litigation may arise from SPACs, given their newness and regulators increasing scrutiny.

“For private companies considering SPACs, their renewals are increasing significantly,” Cho said.

RPS reports that the D&O and employment practice liability (EPL) market for nonprofits is relatively stable, with flat to 10% premium increases, although California and healthcare-related entities are seeing significant increases. However, the report adds, underwriters are closely eying nonprofit accounts regardless of geography and declining to renew those that have had claims or fall within a difficult class of business.

Similar dynamics are at work in the legal professional liability market, where carriers are cutting back on capacity, especially for small firms with 10 or fewer attorneys — the majority of law firms in the U.S.

“And though a firm might have been able to easily acquire $5 million in professional liability coverage in the past, carriers are now offering only $3 million in limits, or maybe $2 million on an account that previously bought $3 million,” RPS said.

“Firms that need larger limits will require multiple carriers to get there.” &

John Hintze is a freelance writer who can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.