We surveyed U.S., European, and Bermudan underwriters and have compiled
opinions on the following subjects/questions:
What are the main exposures/areas of concern currently?
The economic environment impacts law firms, and, in turn, their market for
insurance. A tough economic environment has historically resulted in increased
claims against professional service firms. This is especially true for law firms
involved in large financial transactions. While this increase in claims has not yet
occurred, underwriters remain watchful. The economy has caused a significant
increase in bankruptcies, and aggressive bankruptcy court trustees could attack
outside professionals like lawyers and accountants for potential remuneration.
Almost all organizations, from our government to the smallest private firms, have
been forced to cut costs. While the cost-cutting measures of many firms and new
client engagements may promote profitability, and in some cases even viability,
these may be occurring at the expense of sound risk management principles and
procedures.
Widely accepted to be part of the cause of the economic recession, financial
industries have spawned numerous exposures for law firms, especially in the practice
areas of real estate transactions (sub-prime mortgage securitization/collateralized
debt obligations, foreclosure work) and investments (especially massive frauds, such
as Madoff, Stanford, etc.). Finally, regardless of the state of the economy, perennial
concerns for insurers include work in the mass tort and class actions, intellectual
property and patents, entertainment, and securities areas.
What are the major causes of claims, in terms of frequency and severity?
Failures in or weak risk management procedures—client intake, engagement and disengagement letters, client communication—
are leading causes of claims frequency. Further, firms’ collections of or suing for fees frequently results in being counter-sued
for malpractice. Patent, tax-shelter/investments, and trust work often increase severity. Bankruptcy/insolvency and real estate
transactions work may lead to both frequency and severity of claims.
What are the underwriting results?
While actual data is not available for the industry, it is observed that since hitting loss ratios of 150 percent to 200 percent a few
years ago, carriers have instituted tighter underwriting practices, which include increasing rates, increasing retentions, decreasing
capacity, and declining coverage when warranted. This seems to have been a successful strategy for carriers, which are allowing its
underwriters the ability to pick and choose their desired firms and to provide ample capacity and beneficial rates, when deserved.
What do you see happening with the market’s participants and capacity?
Overall, the number of participants and the amount of capacity are both increasing. There have been several entrants in the
primary area, which should increase competition, and bode well for law firms. There have also been several entrants in the excess/
high-excess area, which should provide more options for firms seeking higher limits of liability and greater asset protection. As
respects capacity, even though reinsurance is more expensive and more difficult to acquire, very few carriers are cutting back
capacity, and many are increasing, or attempting to increase, their capacity. Again, this is a good sign for law firms.
What have the exposures, claims, and capacity done to premium rates?
Deteriorating underwriting results, decreasing exposure and premium bases, and poor investment results have incentivized
underwriters to push for rate increases over the last 18 months. Despite this effort, market capacity has mitigated rate increases and
even allowed some decreases during 2009. Small- to mid-sized firms and mid-sized to large firms with manageable practice areas,
strong risk management procedures, and good claims history have benefited. It is unlikely that rate decreases will continue much
longer for large firms, but the highest quality firms should be able to secure flat renewals to single-digit rate increases. Smaller firms,
depending on their practice areas, risk management procedures, and claims history, may secure slight decreases or flat renewals.
In this market, it is highly recommended that any type of firm—small or large, with few or extensive losses and standard or
challenging practice areas—engage a broker with extensive experience and relationships in the professional liability market for law
firms to secure the most favorable program, in terms of coverage and pricing.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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J.C. Wileman
Account Executive, Unit Manager
Senior Vice President
Los Angeles, CA
Tel: 213.689.2343
E-mail: jcwileman@lockton.com |
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