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Alan Raman
A new survey from Ames & Gough shows that most insurance companies plan to increase architects and engineers (A&E) professional liability insurance rates for the third consecutive year.
The specialist insurance broker reported that the growth was driven by concerns over the impact of economic and social inflation on claims costs, as well as heightened risks associated with specific project types, specialist design disciplines and evolving project delivery methods.
Seventeen leading insurance companies were surveyed, representing a significant portion of the overall market for professional liability insurance for U.S. architects and engineers. According to the findings, all but one insurer plans to increase rates, with one seeking to keep rates unchanged. Among insurers raising rates, 75% planned increases of up to 5%, while 25% planned increases of 6% or more.
Cady Sinks, assistant vice president and partner at Ames & Gough and co-author of the survey, said the market is “cautious” but the outlook is also “cautiously optimistic.” Despite the exit of a major insurance company, more limit restrictions and rate increases, “Part of what I try to tell my clients is that some of this is to ensure that the insurance companies in today’s market are able to stay in the market for the long term,” she explain.
“So I think the positive thing about all of this is that insurance companies are really taking a cautious and careful look at their businesses for the long-term outlook,” Hinks continued. “That’s not a bad thing. We want them out there. We want them strong and healthy to provide coverage for our customers.”
Solve movement problems
in the market
Ames & Gough’s annual survey aims to inform clients of the changing A&E landscape through ongoing research. The author’s goal is to find valuable new information every year, and this year Hinks emphasized the importance of moving to a more collaborative approach due to changing market dynamics.
“I’m finding that for myself and Amesgoff, we’re really taking a more strategic and holistic approach to our clients because the industry is changing so dramatically,” she said, explaining that the rate hikes are bigger than It was slightly higher last year and more consistent across industries.
“I think the strategy is really trying to make sure insureds know there’s a lot of movement in the market,” Hinks said. “If they need special projects, higher practice limits, etc., they really need to work with us early on in the strategy so that we can serve them.”
Limit reduction
While more than three-quarters of insurers surveyed reported consistently offering professional liability limits, only 40% said they could offer limits in excess of $5 million (compared to two-thirds of insurers in the 2023 survey dropped significantly).
As a result, while market capacity remains generally stable, some insurers are reducing single account limits.
“In seeking higher professional insurance liability limits, many emergency room companies now find themselves between a rock and a hard place,” explained survey co-author Jared Maxwell, vice president and partner at Ames & Gough. “They need to meet Project owners have higher limit requirements, but also face greater underwriting scrutiny to obtain them.”
For design firms, “try negotiating with owners to check if higher limits are needed. If the firm still needs an increase in limits, they may explore alternative structures such as specific additional limit recognition/project overage or review their program structure and Establish tiers with multiple participating insurance companies,” he said.
Increased severity of claims
Only 6% of insurers surveyed said claims severity had declined in 2023, while 18% said the claims experience was worse in 2023 than the previous year. Meanwhile, 81% of insurers believe inflation is driving up costs, noting that construction inflation exceeds overall inflation, with materials, supplies and labor costs higher.
Most insurance companies surveyed also reported paying out millions of dollars in claims in 2023. Twenty-three percent of insurance companies paid claims of $5 million or more, and 12% paid claims of $10 million or more. Ames & Gough reports that the largest claims often involve projects or disciplines considered high-risk by insurance companies. When asked to rank the top three disciplines for claim severity, 82% of insurers surveyed cited structural engineering, followed by civil engineering (59%) and architecture (47%).
Projects are larger and more complex than they were 10 or 20 years ago—a trend Sinks believes is continuing. Mechanical, electrical and plumbing companies are working on more complex systems and as expectations rise, “we are seeing an increase in claims from MEPs,” she said. Ames Goff’s civil roads and highways, she added The company also received a large number of claims.
General interest rates rise
According to the report, 75% of insurance companies surveyed plan to increase rates in 2024 for accounts with adverse losses. Meanwhile, 56% of insurers will target projects they deem to be higher risk, such as condominium and other residential project construction, including multifamily apartment dwellings as well as streets/roads, highways and infrastructure.
56% of insurers also plan to target high-risk disciplines, including structural engineering, mechanical engineering, civil engineering and architecture. Additionally, 25% plan to increase their overall footprint, reflecting lingering concerns about rate adequacy and new concerns about larger claims as business activity continues to rebound.
“While insurers offering professional indemnity insurance continue to compete for acute and casualty business, many are focusing on the most desirable areas of risk while relentlessly applying sound underwriting discipline across their entire portfolio,” Hinks said. “
She continued: “In this environment, design firms need to be more diligent in risk management, covering all aspects of their business – from client and project selection to selecting and managing sub-consultants, maintaining effective quality control, conducting thorough contract review to ensure appropriate risk management.” Allocate contractual risk and provide timely documentation for communication with owners and project participants. “
deeper
Companies participating in the survey include AIG/Lexington, Aspen, Beazley, Berkley Design Professional, Berkshire Hathaway Specialty Insurance, Euclid/Nationwide, Everest, Great American Insurance Co, Hanover Insurance, The Hartford/Navigator, Liberty Mutual, PUA, RLI, River/ Hudson Insurance, Sompo International, Travelers and Victor Insurance.
The full survey can be found on the Ames & Gough website (https://amesgough.com/2024-ames-gough-market-survey-ae-firms-see-steady-growth-evolving-risks-and-inflation-driven – cost/).
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