WASHINGTON, D.C. — After several consecutive years of declining premiums, the insurance market for architects and engineers professional liability insurance (PLI) began to firm last year as a number of leading insurance companies providing this specialized coverage sought and achieved moderate price increases. A new survey by insurance broker Ames & Gough finds a majority of insurers had rate increases last year, and a larger percentage plan to raise rates this year.
According to the Ames & Gough survey of 10 leading insurance companies providing architects and engineers PLI in the United States, 70 percent plan to raise rates this year, 20 percent expect their rates to remain flat, and 10 percent believe rates will decrease in 2012. In 2011, 60 percent of the insurers experienced rate increases. Half those with the higher rates had average increases of 6 to 10 percent or more.
Among insurers planning rate increases in 2012, the expectations range from the low single digits to 10 percent or more. On a combined basis, the insurers in the Ames & Gough survey account for more than 70 percent of the overall U.S. market for this coverage.
“While premiums generally are not going up dramatically, they’re not decreasing much either,” said Dan Knise, president and CEO of Ames & Gough. “Even so, there are still some limited opportunities for premium savings driven by an improvement in a firm’s loss ratio or competition from one of the new insurers trying to grow its market share.”
The Ames & Gough survey found the insurers’ overall drive for higher rates stems from a variety of factors. Most significantly, 71 percent of the insurers planning increases indicated rates had been inadequate, generally as a result of premium reductions over time. Historic claims experience (losses going back more than two years) is the second biggest factor, cited by 57 percent of those planning to raise rates. Rising reinsurance costs and recent claims experience were cited by 14 percent of the insurers as factors driving up rates.
Despite the planned increase in rates, capacity for architects and engineers PLI remains consistent with historic levels. For any individual qualified insured firm, 20 percent of the insurers can provide up to $25 million in limits, 50 percent can provide a maximum of $10 million to $20 million, and 30 percent can provide up to $5 million. In addition, with the ability of multiple insurers to participate on any individual insured program, it’s possible to secure coverage upwards of $50 million when necessary.
“What’s becoming more of an issue is the demand by some owners that their architects and engineers carry much higher limits,” said Mike Herlihy, executive vice president and partner in the Ames & Gough Boston office. “More often we are seeing demands for $5 million of limits versus the traditional request for $1 million or $2 million.”
He added that many firms comply with these requirements by purchasing higher limits, securing “single-project excess limits,” or by carrying “split-limit” policies, in which the aggregate limit is a multiple of the per claim limit. For instance, a split-limit policy might have a $2 million per claim limit and a $4 million aggregate limit.
From the insurers’ perspective, rate changes for an individual account may be driven by a number of considerations. Recent claims experience, the biggest driver of rate changes, was cited by 90 percent of the survey participants. That was followed by type of work or services (80 percent); type of project (60 percent), and historic loss experience (more than two years), cited by 50 percent.
“With type of work a key underwriting consideration, design firms approaching insurance renewals need to categorize their fees properly into standard, high, and low risk categories,” said Knise. “While abandoned projects and feasibility studies might be considered low risk, condominiums may be higher risk from an insurer’s perspective. There’s no question, in this environment, a complete, clear application can be a real plus at renewal.”