Per risk working layer program rate on line varied by subclass of business for per risk errors and omissions (E&O) reinsurance. Lawyers professional liability fell 10 percent year over year for the larger law firm segment, while flat to down 15 percent for smaller cedents. Real estate E&O rates were flat to up 2.5 percent year over year, and accountants professional liability was flat to down 10 percent. Large miscellaneous cedents had rate changes that were flat to down 10 percent, with smaller companies flat to down 7.5 percent.
Excess of loss pricing is dependent upon three factors: 1) actual results of the portfolio, 2) rate change on the portfolio and 3) investment returns. As a result of the interaction of these three levers, some programs received slight rate increases because of the deteriorating loss experiences of their portfolios. Some are including additional coverage in the programs as well (e.g., contract wording flexibility and new lines of business such as tech/cyber E&O) while others had decreases.
The exposure base (revenue) was down in several E&O classes (medical professional liability, architects & engineers, technology). It is hard to quantify an exact percentage decrease in revenues year over year, but if the industry were dependent on sectors such as construction, it would be off significantly. This has driven increased competition on the primary business as carriers are seeking to write business, but with a smaller premium base.
There is a dichotomy between reinsurance and insurance pricing as a few reinsurance markets are pushing for rate increases on E&O programs due to either loss emergence or rate erosions. This is causing a significant disconnection between the insurance and reinsurance market and reducing the amount of reinsurance capacity as well.
Cedents were pushing to renew deals at expiring terms and increasing their retentions either through increased attachments or co-participations. Several cedents considered switching from quota shares to excess of loss in an effort to increase retained premium. Consequently, several reinsurance markets elected to reduce their participations on programs due to the concerns stated above, without completely exiting the E&O marketplace. Others are looking to write E&O if the market conditions can be factored into the program.
In 2010 several buyers with proportional treaty structures sought to increase net positions to retain more upfront premium in the proportional treaty segment. There was also a disconnect between the clients’ requested terms, e.g., increased ceding commission, removal of line of business restriction, caps, etc., and what the reinsurance markets were willing to support based on the program’s performance. There were a few cedents that placed expiring or close to expiring percentages of their reinsurance programs.
Ceding commissions have been challenged due to rate/pricing deterioration on primary business. There were fewer reinsurers willing to support high ceding commissions due to increases in loss development and challenging pricing conditions.
Proportional capacity for this class of business has decreased slightly, but there are several reinsurers that still view E&O more favorably than management liability and other professional liability lines of business.