Even if you’ve never
experienced a claim, you may be facing a 25%, 50%, or even
greater increase in premium!
THERE
ARE A NUMBER OF REASONS THAT THIS IS HAPPENING:
First of all, over the
past decade, legal malpractice insurance rates have been
dropping, along with most other types of insurance. New carriers
– often with very little experience in this potentially volatile
area of coverage – have jumped into the market, hoping to make a
quick killing. Of course, there is no quicker way to grow your
policy numbers than to charge ever-lower premiums.
In turn, this creates
significant downward pressure on all insurance carriers, since
even those underwriters will a long history of experience and
commitment to the lawyers professional liability market are
faced with the prospect of losing business to the new,
inexperienced underwriters, offering pricing that is sometimes,
"to good to be true."
Throughout the latter
part of the 1990’s, and into 2000, insurance carriers were able
to make up for underpriced coverage – and the resulting
underwriting losses – by investing premiums in the booming
equities markets. Like many of us, insurance companies began to
think that the good times on Wall Street, and the dot.com boom,
would never end. Underwriters became more and more focused on
bringing in premium dollars, even if it meant significantly
relaxed underwriting standards.
Of course, as we all
know, the dot.com "boom" has since become the dot.com "bust",
and a whole lot of cold water has been thrown on the
expectations of investors. Returns are down – way down – and
sometimes gone, entirely. Insurance company investment
portfolios are no longer generating the massive returns needed
to make up for underwriting losses. In addition, some insurance
companies, just like many other investors, have been forced to
write-down substantial portions of their portfolios, severely
reducing the capital available against which to write future
business.
It is rumored that some
lawyers professional liability programs are operating at overall
ratios of as much as 140% to 150%! In simple terms, this means
that for every $1.00 earned in premium, the insurer is paying
out $1.40 to $1.50 in losses and expenses. It certainly doesn’t
take a rocket scientist to see where this sort of thing will
lead!
Add to this the fact that
malpractice claims against lawyers are on the rise – both in
terms of frequency and severity. To be sure, some states are
statistically more litigious than others, and these states do
generate more than their share of claims activity. In fact, a
few states are seeing insurance carriers either withdraw
entirely from the lawyers professional liability market, or
severely curtail their new and renewal business.
The lawyers professional
liability marketplace is become littered with the names of
carriers who have withdrawn from the market, either voluntarily
or due to failure. Included in this list are such names as
Kemper (Lumbermens Mutual Casualty Co.), American National
Lawyers Insurance Reciprocal (ANLIR), Legion, Garden State
Indemnity, OHIC/HUM, BCS, Reliance, Frontier, to name but a few.
Finally, the tragic and
unprecedented events of September 11th, 2001 have had – and will
continue to have – a truly significant impact on insurance
premiums. With insured losses estimated somewhere between $40 to
$60 Billion, it is inevitable that a reduction in available
capital of this magnitude will create a sharp, upward movement
in pricing. To put this in perspective, the next two largest
events from an insured-loss standpoint are 1992's Hurricane
Andrew ($15 Billion) and 1994's Northridge Earthquake ($12.5
Billion). Both are substantial sums, to be sure, but they
pale in comparison to 9/11.
Insurance capital, like
everything else, is a finite commodity, and is thus subject to
the same principals of "supply & demand" that affect just about
everything in a capitalist society. When there is less of
something available, it becomes more valuable, and thus more
expensive. Eventually, of course, the supply of capital will
return to "normal" levels, but this will take time.
A question that we hear
often these days is, "what does professional liability insurance
have to do with what happened on 9/11?" Good question. The
answer is that all insurance companies must, themselves,
purchase insurance. This type of insurance is referred to as
"reinsurance" and it is the reinsurers who will end up absorbing
the vast majority of the losses incurred on 9/11.
As an example, let us say
that you purchase an insurance policy with a limit of $1
Million. The insurance company that issues your policy may
retain, say, 10% to 25% of that risk. Anything above that is
covered through the purchase of reinsurance, the premiums for
which are paid from the premium you paid for your policy. This
is referred to as, "ceding the risk" to the reinsurance company.
Almost always, this transaction is invisible to you, the
purchaser of the policy, and regardless of any arrangements with
the reinsurer; your primary insurance company remains fully
responsible to you for 100% of the policy limits.
Now it is rare that a
contract of reinsurance is negotiated on a policy-by-policy
basis. This would be far too cumbersome and expensive. Most
reinsurance policies (generally referred to as "treaties") are
put in place for all policies written by a primary insurance
company during a set period of time.
Since 9/11, as these
reinsurance contracts have come up for renewal, primary insurers
have seen the rates they must pay go up substantially. Indeed,
some lines of business, such as property coverage for
high-profile commercial properties, building contractors, and
workers compensation, have experienced far greater increases in
reinsurance rates than have most types of liability. No line of
insurance, however, is immune from the impact of what occurred
on 9/11.
