Small business owners are facing a variety of new and challenging exposures, which are shifting the makeup of professional liability risk and changing the way business owners must approach risk management.
Independent contractors, the sharing economy, legalized marijuana—small business owners today face a variety of challenging exposures they simply didn’t have to worry about as little as five years ago.
And those exposures not only shift the makeup of professional liability risk, they also change the way business owners must approach risk management and due diligence in offering professional services.
“Demand for professional liability insurance is pretty strong, and I think demand will remain strong as we head into 2020,” says David Egosi, head of professional risks at Hiscox USA. “We’ve definitely seen more buyers in the last five to 10 years as people become more aware of the gaps they have in their general liability policies.”
During 10 years of a recovering and even thriving economy, “professional liability coverage has broadened while rates have come down a little bit, which has put pressure on profit margins for carriers,” Egosi explains. “There are some emerging exposures that have not been as well contemplated in the professional liability space that are starting to bubble up with more frequency.”
“It’s also more expensive to handle claims than it was in prior years,” Egosi adds. “That hasn’t necessarily moved in lock step with the rate change in sectors like health care, larger architects & engineers design professional firms and real estate professionals, where you tend to see a little more attritional activity.”
Looking toward 2020, “it appears that insurers will continue to look for rate in a number of professional liability products,” says James Proferes, global executive underwriting officer, professional liability, Markel Corporation, who notes that in 2019, rates have hardened in directors & officers and employment practices liability insurance in particular.
“The driver is the need of insurers to take into account continued higher-level than average claims frequency,” Proferes explains. “Insurers have realized that over the past decade, rounding up, the cost of defending, resolving or settling a D&O or EPLI claim has been more expensive.”
The situation is “unusual,” Proferes points out, because it’s happening at a time when unemployment is very low. “In the past, professional liability rates have been very sensitive to economic shocks,” he says. “But in an otherwise very good economy and very low unemployment period, rates have still needed to go up because claims frequency and severity for all size companies has remained high.”
Across the board, then, the uptick in claims frequency and simple claims inflation “could be a leading indicator of rates ticking up a bit,” Egosi explains. “But there is plenty of capacity readily available in the space, which is helping offset any of that rate hardening in the majority of sectors.”
“The very good news for independent agents and for policyholders is that capacity in all the professional liability products remains very available,” Proferes agrees. “Despite potential price firming or hardening, capacity is plentiful. There is a lot of choice out there.”
Because the professional liability market incorporates such a wide variety of risks, “coverage tends to be tailored or customized to specific sectors,” says Egosi, who estimates that the small commercial marketplace in the U.S. is worth upwards of $100 billion. “There’s a lot of opportunity to be successful, but you don’t need to boil the whole ocean. Pick your niche and do it well.”
Jacquelyn Connelly is former IA senior editor.