Soft insurance market meets design professional business growth
In market terms, the architects and engineers (A&E) insurance market in 2016 was soft. A survey of nearly 80% of the A&E market conducted by specialty broker Ames & Gough revealed flat pricing for over half of the insurers (53%). Though a minority saw higher rates (16%), 32% did see rates fall.
A comparison of 2016 to the 2015 survey results shows that it’s a downward trend that’s growing. That year, rate increases were reported by 38% of insurers, flat rates by 57%, and lower rates by 8%.
It’s in that soft market that insureds are experiencing ample capacity (some has doubled) and plenty of competitors for the business. According to Lawrence Moonan, executive vice president and chief operating officer
at Berkley Design Professional Underwriters, a Berkley Company, there are over 50 insurance markets writing professional liability coverage for design firms.
Yet with the soft market comes some good news: the design professional industry is growing and expanding, say the experts. And thanks to a strong recovery from the 2008 recession, the forecast is for more expansion and design firm growth.
Coverage and pricing
That growth couldn’t come fast enough for many insurers. David Blue, divisional vice president for Great American Insurance Group, says the design professional market is “extremely competitive. Most of the established carriers in this marketplace are being forced to file new products and/or coverage to keep pace with the emerging carriers in the market.”
What constitutes coverage is where the greatest change has occurred within the A&E market. The liability policy has expanded from professional liability to pollution liability stemming from professional services, and even into network security and privacy liability, says Jim Bechter, senior vice president of Tokio Marine HCC.
Even the additional insurance concerns have done little to affect capacity and availability. “In the last five to ten years, we’ve seen a growth of supply,” says Bechter. “More insurance companies, underwriting managers, and foreign insurers are trying to write the business. It’s the classic case of a lot of over-supply driving down the price for the insurance coverage. When you have an economic downturn like we had a few years ago, it creates more competition for a smaller professional fee rating base.”
Ron Kiefer, senior vice president of RPS, says he’s seen pricing that’s flat to decreasing. That’s caused some carriers to ramp up their offerings. “Some carriers are writing $10 million, when in the past they were offering $5 million,” he notes.
Moonan agrees, adding that leading carriers are expanding coverage to address emerging exposures. “The dominant carriers in this niche typically offer specific products that align with the needs of small, mid-sized, and large firms, for both primary and excess coverage,” he says.
Yet Steve Hansen, vice president of Tokio Marine HCC, says carriers are remaining in the market because the claim frequency is low. He says the A&E market is currently perceived to be a profitable line of business, and that’s driving rates downward; unless claims pick up, there will be little movement. That could be a few years out, he adds. “It takes three to four years to see your claims results. With the economy picking up, we’re seeing firms growing; we’re seeing more construction. With more construction will come more claim activity.”
“Design professionals tend to be on the forefront of emerging technologies, e.g., drone usage, 3D printing, etc. As these new technologies are implemented and other new ones emerge, design professionals need to have consistent and timely communication with their insurance professionals to understand where there might be gaps in coverage and how to address them.”
Divisional Vice President
Great American Insurance Group
For now, the common claim drivers are, Hansen says, design errors, cost overruns, delays, construction defects and construction accidents. Bechter says there are pockets of regional concern, such as condo projects in the Sunbelt, where exposures may be particularly troublesome. “Project types and location tend to drive the claims,” he says.
So does lack of communication, says Blue. He says ignoring the smaller issues often results in larger problems. Yet it’s a claim driver that firms have control over. “While technical errors and omissions do represent a large portion of claims in this industry, I would say well-documented and timely client communication help to manage client expectations, which is another significant source of claims.”
Emerging claim concerns
A growing area of interest and concern, according to Bechter, is network security and privacy liability. Though he says this exposure is not an active area of claims within the design professionals space currently, it’s one that insurers are addressing now within A&E. “More carriers are adding coverage parts addressing network security and privacy liability.”
What’s not being addressed by design firms is the potential for cyber extortion. Kiefer says hackers are hijacking computer systems in other disciplines—law firms, for example—and demanding ransom. He thinks design firms are “highly susceptible” to such extortion. To date, he’s seen no incident from a claims perspective, but he says losses in construction have been well-documented.
Yet loss of data, ransomware, and accidental disclosure of confidential data are still major concerns for design firms, says Moonan. He says that, too often, firms don’t comprehend the extent of their cyber exposure, though the firms with revenue in excess of $15 million are purchasing cyber coverage under a separate policy. “Many leading A&E professional carriers provide some grant of third-party cyber liability coverage related to professional services. Some even offer limited first-party coverages, as well,” he adds.
Beyond cyber, there are changes within the design practice that Kiefer says are causing increased exposures: the way projects are being delivered. Whereas the previous model would be property owners selecting from design firms, owners are now going directly to the contractor, who then subs out the design work. “Contractors are now the ones in direct communication with the owner, not the design firm as it was previously,” he explains.
While this is not a new trend, Kiefer says it’s becoming the preferred way to build a project. Claims, he says, stem from lack of communication between design firms and project owners.
Another serious concern, he says, is a shortage of experienced designers; new designers are making technical mistakes due to inexperience. “We are seeing claims that are due to lack of detail. What I think has happened is, as firms have gotten busier, their quality control may not be what it should be.”
That’s where Blue says building information modeling can help. “We believe this shared resource of information for a project helps to improve the construction of the entire life cycle of a project.”
Additionally, Blue says firms taking a more proactive approach to contract review and negotiation facilitates a more equitable distribution of risk. Bechter says he continues to see firms making a concerted effort to avoid additional risk. “Brokers and engineering firms are getting more savvy on indemnification and avoiding warranties or guarantees—things that would raise their standard level of care beyond what the common law would hold them to.”
“From a risk management standpoint, the architect should make sure it is hiring design subconsultants that carry their own professional liability coverage,” says Hansen. “We continue to see claims where an architect has hired a subconsultant without insurance or without adequate limits.”
And firms should also become better at managing their exposures—an area where Moonan says he’s seen firms becoming more sophisticated. “There are more information resources than ever before. Industry associations, insurance brokers, carriers, and outside counsel are all there to support contract reviews, negotiations, and enhanced risk management practices. Automation has also helped to improve the coordination and production of design documents.”
But, he says, there are still risks going uncovered. That’s where Moonan says specialist insurance brokers can help as they “offer access to insurance companies that provide broad coverage, expert claims handling, and a wide range of educational programs and tools to support sound business and risk management practices.”
“Like everything else in life, you really have to look at the details of the services you’re getting beyond the policy language,” says Kiefer. That includes contract review and educational programs offered by the carrier, he adds.
On firm ground
And pay attention to the contract, says Blue. “A firm’s contract is the foundation of risk management. We are strong supporters of industry standard contracts—for example, the American Institute of Architects contracts. Additionally, firms that have established continuing education sessions, peer-review, and project- and client-selection processes are viewed more favorably.”
Kiefer says firms can get to that favorable place by mitigating claims through education and quality control. “Using education will avoid claims,” he asserts. It does work. “It has been proved, and firms that are focused on this are the better risks, especially in this environment, where there are new jobs starting every day and new designers coming into the industry amid this hiring frenzy.”
Hansen adds that longevity with a carrier certainly helps. “A lot of brokers and agents will go with the carrier that’s the cheapest that year. If you have a big claim, there’s no incentive for that carrier to stay with that risk, as they move all the time. On the other hand, when you do stay with a carrier, there’s a little more rapport.”
Broker and agent advice
For brokers and agents wanting to capitalize on the A&E space, the experts say it takes becoming the go-to resource for their design firm clients. “Brokers and agents should do their due diligence in checking out the attributes of the markets,” says Bechter. “That includes the rating of the insurance company and its longevity in the business.”
It also includes staying on top of industry changes. “Design professionals tend to be on the forefront of emerging technologies, e.g., drone usage, 3D printing, etc.,” says Blue. “As these new technologies are implemented and other new ones emerge, design professionals need to have consistent and timely communication with their insurance professionals to understand where there might be gaps in coverage and how to address them.”
It’s that understanding of policies and providers, along with the emerging exposures that technology brings, that will help agents and brokers differentiate and help their clients grow business without growing exposures, say the experts. “Be proactive,” says Moonan. “Manage issues when they arise during the course of a project. Enlist the help of carriers to resolve issues sooner rather than later.”
For more information:
Berkley Design Professional Underwriters
Great American Insurance Group
Tokio Marine HCC
Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.