March 1st, 2010

Errors & Omissions Insurance at the January Renewals

Posted at 10:00 AM ET

Anticipating that the recent economic downturn, as it had in prior occurrences, would result in increased claims activity, primary insurers sought rate increases. The highly competitive market environment prevented them from realizing the increases. Primary E&O rate reductions continued downward in 2009, averaging declines between 5 percent and 10 percent for insureds exhibiting no material change in exposure and loss activity. Certain sub-segments, such as small to mid-sized law firm business, are indicative of the highly competitive landscape of the E&O segment.

 Carriers looking for growth opportunities have entered new states or expanded marketing efforts particularly targeting mid-sized firms. Large law firms have a far less competitive marketplace and as a result rates were not under as much pressure. A notable exception was financial institution E&O, which continued to exhibit double-digit rate increases during the first half of 2009. However, these rate increases came down to more modest single digit increases in the fourth quarter of 2009, particularly for those risks that had already experienced significant rate increases a year ago.

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Excess of loss reinsurance rate trends for E&O depended on the exposure composition and loss experience of the underlying portfolio. Excess of loss placement rate changes typically ranged from flat to increases of 5 percent. Portfolios with loss activity accordingly saw rate increases in excess of 5 percent. Reinsurers tend to prefer the smaller risk size end of the E&O segment where there is ample treaty capacity. This preference has resulted in many treaties covering this type of business renewing at flat or slightly reduced prices. For larger risk E&O (such as large law firms) there are far fewer reinsurers that will entertain this type of business, as a result, carriers are forced to take larger net (unreinsured) lines. Treaties that include financial institution risk continue to undergo reinsurers’ scrutiny with a growing concern that rates will start to decline in 2010.

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