E&O market defies predictions

Oh where, oh where has the hard market gone?

By Phil Zinkewicz

Mark Twain, having learned that a newspaper reported his demise, is said to have responded: “The news of my death has been greatly exaggerated.”

The property and casualty insur­ance industry is, overall, in the midst of a soft insurance market and has been for many years. Industry executives, on both the carrier and producer sides, have been watching industry pricing developments, line by line, to determine when or whether there will be any signs at all of market hardening.

Most particularly, in the area of insurance agents errors and omissions coverages, industry solons had been expecting a hardening of the market following Hurricane Katrina. In the wake of that catastro­phe, it was anticipated that there would be a spate of lawsuits against independent agents because insureds were alleging that agents did not properly warn them that the basic homeowners policy didn’t cover flood losses, and that the lawsuits would harbinger a hardening market.

The lawsuits did happen. However, as for reports of a hardening agents E&O market, it appears that those reports were highly exaggerated. Even as recently as last year, industry observers were predicting the inevita­bility of a hard market but, so far, their hopes have been dashed. Last year, in a Rough Notes magazine report (June 2009, “Is agency E&O heading toward a hard market?”), Mark Lann of Modern Insurance Consultants, a hybrid of retail and wholesale accounts whose primary book of business is in the agents and brokers E&O area, had this to say about the 2009 market: “The market has been soft because there have not been enough premium dollars to support the business.”

He continued: “I don’t think the business has been properly under­written. It has been underwritten just to chase after premium dollars. The E&O market was really soft last year. However I think that the market will harden this year. There are already signs. Lexington Insurance Co. has instituted a rate hike of about 7%.”

Wishful thinking? That was in 2009 and, as we all know, the market never did harden. How does Lann describe the market in 2010? “Cutth­roat,” he said without hesitation. “In some cases, prices have been reduced even lower than last year. As for the Lexington situation, they lost a good deal of business by trying to bring in a rate hike. Our premiums dropped by 10% last year, and now they’re down 5% first quarter.”

Lann noted that hurricane season is upon us, and that might bring about a hardening of the market. “Nobody wants a catastrophe, and certainly insurance carriers are not happy when the wind blows, but at present it appears that’s the only way the market will turn. Of course, if the economy improves, that would be of enormous help.”

In the same Rough Notes article last year (June issue), Glenn Clark of Rockwood Programs also said he believed the market was hardening. He said, “Although still very active in agents E&O, AIG, given its current situation, could curtail writings and that would result in some displace­ment. As for CNA dropping out of the agents E&O market, there has been a lot of displacement there. Lawsuits are not yet on the rise in any signifi­cant way, but there are things that are brewing that may pop up later.”

Again, that was last year. This year, Clark says that the soft market of last year has persisted. “The mainstream agents E&O market remains price sensitive,” he says. “However, there are some changes that are occurring that indicate a possible return to price sanity in 2010. Paco Assurance Co., for example, has pulled out of the agents E&O market, effective April 1, 2010. At Rockwood, we play in the nooks and crannies of the agents E&O market, such as the start-up operations and newly licensed businesses, not the mainstream operations.”

Linda Blechman of Lee & Mason Financial Services admits that she was among those who believed the agents E&O market would have hardened by the end of 2009. Noting that her firm writes nothing but agents E&O, Blechman says that last year there was a general consen­sus that the market would begin hardening, but it didn’t happen. “Our revenues are flat, but we have always been pretty lean on expenses, so we continue to make a profit.”

Bernard R. Geis, president of H&W Insurance Services in Shawnee Mission, Kansas, says that, despite industry efforts to bring about a change, the market remains soft. “A lot of markets out there have tried to resist price decreases, usually by broadening coverages and offering more bells and whistles. Even the excess and surplus lines companies are offering the bells and whistles. If that doesn’t work, then they just go ahead and cut prices.”

Asked whether the claims that might be coming from Katrina could change the agents E&O market, Geis was not optimistic. “The Katrina claims have long been settled by this time,” he said.