What AM Best Says
Expert Opinions

• John Weber
• January 2021
• 

The COVID-19 pandemic may spark additional claims for professional lines, said Sridhar Manyem, director, industry research and analytics, and David Blades, associate director, AM Best.

AM Best recently conducted a survey in conjunction with the Professional Liability Underwriting Society. The survey asked the society's members about the impacts of the pandemic on the professional liability insurance segment.

“We got close to a hundred responses from a very diverse set of people,” Manyem said. “It included agents, underwriters, brokers, executives, so on and so forth. It was a really good survey for us to get into the minds of the industry to figure out what the impact of the pandemic was on different lines and how they are seeing these lines prospectively.”

Both directors discussed the Best's Special Report Professional Liability Insurers Navigate Uncertain Terrain Amid Pandemic with AM BestTV. Following is an edited transcript of the interview.

What lines comprise the professional liability segment? How were these lines faring heading into the pandemic?

Blades: In general, professional liability insurance protects professionals such as accountants, attorneys, physicians and many others against negligence and other claims that are brought against them by their clients.

These are the types of professionals who have a particular expertise in an area that needs this type of insurance because general liability policies do not offer protection arising out of business or professional practices, such as negligence, malpractice or misrepresentation.

Depending on the type of professional person that's involved, professional liability insurance can be referred to as errors or omissions insurance for professionals such as real estate or insurance agents.

Professional liability policies are usually written on a claims-made basis, which means that coverage is good only for the claims that are made during the policy period. They typically indemnify the insured against losses arising out of any claims made for any covered error or omission or negligent act committed during the conduct of that insured's professional business.

With that as a backdrop, in this report our focus is on five specific professional liability coverages—directors and officers liability, errors and omissions liability, medical professional liability, employment practices liability, and then we also touched on cyber liability.

With respect to cyber, there are some E&O policies that include varying, generally small amounts, of the same type of coverage that cyber policies provide but there are some key differences.

Because of some of the blurring of those coverages between the cyber policies and the professional liability policies, we and our contacts at PLUS felt it was appropriate to cover cyber liability in our report.

How were the lines faring heading into the pandemic? Challenging market dynamics across the vast professional liability landscape caused AM Best to revise its outlook on the professional liability segment from stable to negative back in March of [last] year.

In arriving at that decision, we cited a few specific reasons. We looked at the conditions in the D&O market, which is probably the largest segment, premium-wise, in terms of the overall professional liability market.

From a D&O perspective, and public D&O in particular, those market conditions were clearly hardening after years of depressed rates due to capacity-driven competition that led D&O insurers to suffer growing underwriting losses in the last few years.

The medical professional liability segment also carried its own distinct negative outlook heading into 2020. That outlook was tied to rising loss cost trends, diminishing prior year loss reserve redundancies, and depressed demand, along with concerns for rate adequacy.

Underwriting results for that line had also been deteriorating. Again, that factored into the negative outlook that AM Best already had on the medical professional liability segment coming into 2020.

Loss severity for D&O, E&O and EPL [employment practices liability] had already become problematic in recent years due to the rising cost of litigation attributable to social trends—or what's commonly referred to as social inflation.­­

The EPL segment had been plagued by a notable increase in harassment suits, a lot of them probably attributable to the #MeToo movement.

Then, looking at it from the cyberrisk standpoint and privacy liability, those exposures had been increasing because cyber in general is an increasingly complex topic. Those risk characteristics have been making cyber liability pretty difficult from an underwriting standpoint for underwriters coming into 2020.

When you look at it from that standpoint, those are how those individual five lines of professional liability coverage were behaving coming into 2020.

Given the health care ramifications, what did respondents say about the MPL line?

Blades: Coming into the year, whether the issue was rate adequacy or rising loss cost trends, MPL insurers were already feeling pressured. Then the onset of the pandemic led to staff shortages due to the deluge of patients that needed attention during the initial wave of the pandemic.

There was also a lack of needed medical supplies initially that created a heightened level of risk for health care professionals to potentially be hit by a number of lawsuits to the extent that the level of care they were providing was being compromised in some way.

The depth of the problems being faced by health care professionals working in long-term care and nursing home facilities was particularly acute.

Nursing home and long-term care facilities, those are institutions that have suffered a comparatively large number of COVID-19 deaths. That led to increased chances that the families of lost loved ones might file suit alleging some sort of inadequate care was being provided.

D&O insurers were already being tested before COVID. What did the survey results show on what's happening since the pandemic surge?

Blades: For insurers of public companies, D&O specifically, the issues have only become more complex and potentially hurtful to underwriting results since the pandemic.

Public companies had to deal with questions and potential lawsuits that were centered on their response to the pandemic and whether that response was deemed transparent and comprehensive—as transparent and comprehensive as it needed to be.

Retentions on D&O accounts had already been rising due to the escalating cost of defense. Insureds had to raise their attention as to how much they were retaining in terms of those policies coming into this year. That's probably only going to continue trending upward as we go forward.

That's because the defense costs are only going to continue rising due to COVID-19 claim activity. Both public and private companies have been fighting through the economic downturn that's attributable to the pandemic in order to keep their companies afloat in the current economic environment.

They are having their actions, all their actions, heavily scrutinized by their customers, their employees and their shareholders. To the extent that ... those market constituents hold corporate managers responsible for the weakened state that some companies find themselves in, lawsuits are emerging that D&O insurers are going to have to defend.

Whether those lawsuits go to trial or not, rising legal costs are definitely a reality for D&O insurers.

Given the work-from-home environment, how has the cyber insurance landscape been impacted?

Manyem: The line has evolved considerably from an E&O policy to a stand-alone product that incorporates a variety of hazards that it covers.

Especially with the work-from-home environment, hacking techniques have become much more advanced as they combine powerful computer code along with social engineering methods like behavioral dynamics in order to penetrate into networks and computers, and compromise the privacy and security of these networks.

Clearly the demand for cyber insurance has increased a lot. Insurers are aware, not just about affirmative cyber losses that they provide, but they are also being really careful about the silent cyber, the cyber hazards that are hidden in different, other policies such as in D&O or medical malpractice liability kinds of insurance.

Definitely, awareness has increased. Of course, there is a lot of pressure from regulators like the GDPR [the EU General Data Protection Regulation], the California Consumer Privacy Act and so on. Other regulations put a lot of pressures on businesses in order to make sure they protect personally identifiable information and make sure that they have methods in place if that information is compromised.

Ransomware of course has been a growing source of consternation across the industry. The pandemic has made hackers more active. In terms of the impact of the pandemic per se, cyber ranks a little bit behind employment practices liability, MPL and D&O in terms of the impact but definitely there were comments that mention that cybercrime was on the rise.

Health care, in particular as an industry, with more monitoring and other kinds of medicines, will lead to ambiguity between product liability, E&O, cyber and MPL. There's a lot of risk still out there.

Were there any other big takeaways from the survey?

Manyem: The other line that we really didn't talk about that much was EPL, employment practices liability. It looks like they have had to field a higher frequency of claims due to the pandemic because there have been millions of workers who have been furloughed or had their salaries renegotiated or have work-from-home arrangements at play.

These definitely are creating a lot of uncertainty in the EPL line because of all these issues. Separate from the pandemic, I think there are a lot of others. David mentioned the #MeToo movement. There's increasing awareness of racial injustice and the federal Equal Pay Act that bars discrimination between men and women in terms of pay.

All these issues are definitely rising to the fore and creating more litigation and pressure on EPL insurers.