Relationships Between Brokers and Insurers are Critical in E&O Marketplace

Professional lines insurers and brokers must work harder to maintain strong relationships and be creative amid the challenges brought about by company insolvencies and withdrawals from the market, panelists told the recent PLUS E&O Symposium in Philadelphia.

A session on “Market Withdrawal: Current and Future Challenges” focused on the effects of recent market dislocation on insurers, brokers and their clients.

Panel moderator Doug Boyce noted that a number of insurers with a significant presence in the professional liability market have ceased writing business, while others have decided to change strategic direction. “Whichever reason, the effect is the same – a disruption of the relationship between the insurer and policyholder,” Boyce said.

Panelists noted that the shake-up in the market is leading to increased concerns over reinsurance recoverables. A number of reinsurers have ceased underwriting entirely, while several parent companies have decided to sell off their reinsurance operations.

Clint Johnson, senior vice president, ACE USA, commented, “Reinsurance recoverable and reinsurance security is a growing concern in the marketplace today.”

According to Steve Bernstein, vice president, Towers Perrin Reinsurance, many reinsurance run-off companies are operating with a reduced staff which is complicating and slowing up the claims payment process.

Bernstein remarked that, “We have not seen any outright refusals to pay so much as we have seen delays. People have to go through more staff to get payments approved before a check is cut and there are additional demands for documentation.

“Run-off companies do not really care about market perception. Their claims service mentality is ‘we will get to it when we get to it’.”

Citing an example of an insurance company, that was placed in rehabilitation by a state insurance department last year, Boyce suggested balance sheet problems were more to do with a slowdown in reinsurance recoverables than anything else.

“Its cash flow crunch had nothing to do with business assumed. It had to do with the amount of reinsurance purchased that had not been managed effectively,” Boyce said.

Steve Zielinski, senior vice president – claims management, Legion Insurance Company, outlined what an order of rehabilitation meant for a company and its claims handling process. Once an order of rehabilitation is in place, the rehabilitator has the discretion to pay or not to pay claims for losses. Zielinski noted that just because certain claims could not be paid immediately did not mean that they would not be paid at all.

William Vit, chief operating officer, Affinity Insurance Services, Inc., urged brokers to have a contingent plan developed and be ready to explore options with policyholders in terms of price and alternate markets if the existing market withdraws.

“If the contingent plan is properly developed you should have a plan A and B and offer up alternatives as opposed to scrambling when the market is withdrawing,” Vit said.

In the current volatile market brokers need to work closely with the company and management for which they are placing coverage and understand their business. They also needed to stay in touch with rating agency reviews and outlooks on the insurers they are placing coverage with. Communication with policyholders is key, he added.

The panel went on to discuss the role of regulatory authorities in alerting the market to possible problems. Some insurance departments appear to be more concerned about consumers and prices than about companies, until they go under, panelists said.

Stephen Greenberg, partner at Duane Morris, LLP, believed regulatory authorities have a responsibility to act sooner, when insurers start getting into difficulties.

“I see companies that are writing, for example, workers compensation and losing money on it and then someone comes in and writes it at lower prices. When the whole market collapses and the state regulator has to come in, you wonder why no-one said anything sooner,” Greenberg said.

Vit noted that one of the benefits of writing for a larger broker is that it has a formal market security committee that offers advice on how quickly one should move away from a carrier that has been downgraded.

While market withdrawals are giving rise to some opportunities for acquisitions of companies and books of business, panelists expressed caution on such deals.

Johnson concluded that, “A lot of companies have gotten into trouble by acquiring other companies. In the situation where a company is going into supervision or insolvency, I don’t know that we know the business better than the companies selling it.”