The professional liability (errors & omissions) insurance market has always been cyclical. In other words, the market will go for a few years with excess capital which means low premiums and an abundance of carriers offering coverage to accounting firms. However, the capital eventually dries up and those carriers who were looking for a quick profit drop out of the market, leaving fewer carriers, tighter underwriting restrictions and increasing premiums.
2010 was an “extended” soft market for the accountants (and other) professional liability market. The tightening of capital and low investment returns for insurance companies was over shadowed by the recovering recession. The market continued to be soft despite economic indicators that would typically reflect a hardening market.
For 2011, we are starting to see some signs that the hard market may eventually come. Keep in mind, we’ve inaccurately predicted this before.
However, here are 3 specific signs that lend us to believe the hard market is coming:
- Economy is improving.
According to the Commerce Department, the economy grew at an annual rate of 2.6 percent in the third quarter of 2010, a touch above its earlier 2.5 percent estimate. Many forecasters expect gross domestic product to continue to expand at a 3 percent to 3.5 percent pace in the fourth quarter. A separate report from the National Association of Realtors showed existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace, the highest since June but a still-depressed level that was slightly weaker than expected. Surprisingly, an improvement in the economy allows insurance carriers to improve their investment income and demand more underwriting profit.
- Carriers look to get off sub-standard accounts and take premium.
We have seen an increasing trend of professional liability carriers electing to non-renew accounts that just a year ago they were willing to take a chance on. In addition, subsequent to those carriers that have filed formal rate increases, underwriters are being stingier with applying available premium credits.
- The New York Attorney General sues Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud”
In the property & casualty business they have hurricanes and other natural disasters to harden the market. Ernst & Young might just be the hurricane of the accounting professional liability market that pushes carriers to finally tighten up their pens. You can read more about this story here, http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?scp=2&sq=lehman%20brothers&st=cse
In general, no one can predict exactly if the insurance market will harden, or to what extent. But, there are definitely some signs on the horizon. In our next blog, we’ll discuss ways your firm can prepare.