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High risk, high reward: the world of high-risk insurance coverage can be lucrative but tricky for independent agents and brokers who want to do it right. experts discuss market conditions, trends and projected growth in a rapidly changing niche.

Worried that insurance has become nothing but a commodity-driven business? It's not a concern for agents or carriers specializing in hard-to-insure, high-risk businesses: Think medical malpractice liability, financial institution directors and officers' liability, cyber liability coverage and property protection in flood-prone areas.

For even the riskiest lines of business, insurance availability can be difficult but seldom impossible, according to experts. Carriers are leaving no stone unturned in their search for new growth, and part of that approach involves crafting extremely specialized coverages for niche industries in high-risk areas. As a result, agents and brokers with a solid understanding of even the riskiest businesses can usually find creative ways to protect their customers' assets and generate profits in the process.

"I don't think the U.S. is getting any less litigious, so these coverages will continue to grow," said Glenn Clark, president of Rockwood Programs, which has been specializing in employment practices liability (EPL) insurance since the first policies emerged in the early 1990s. "Buyers need the advice of their agents more than ever before. When there is a problem placing risk, people come to us. If an agent really knows the business, it's a great opportunity to demonstrate your expertise because a standard agent can't place it." This means honing an expertise in whatever industry you're serving, said Michael Lamprecht, president of Big Data Insure, a cyber risk consulting firm. "It's no longer enough to just be familiar with the cyber products being offered," he said. "Financial institution cyber liability is very different than the exposure for law firms. Agents must be very aware of the gaps that exist between those policies, and be sure the client gets the coverage they pay for."


Societal trends are the primary drivers of the high-risk market, according to observers in specific lines of business. Booming class-action lawsuits, the ongoing economic malaise, the growth of organized cybercrime (see "A Day in the Life of an International Hacker," p. 40) and catastrophic weather conditions manifest themselves respectively in D&O exposures, EPL claims, cyber exposures and property losses.

Probably the best example are the recent changes in coastal property insurance pricing and availability in the Northeast ever since Superstorm Sandy, said Michael Ray, chief executive officer of Orchid Underwriters Agency in Vero Beach, Fla.

Admitted insurers are finding it difficult to obtain the allowable rate required by regulatory authorities and have "no choice but to decline to write new business or to nonrenew coverage," leaving insureds left to search in the nonadmitted market--his firm's specialty. In that market, "availability is there, although scarce in certain pockets like Florida, Alabama, Louisiana, Mississippi and Houston."

Pricing during the last 3 years in both the admitted and nonadmitted markets have increased to reflect the higher cost of reinsurance, Ray said. He has seen some moderation this year as reinsurers have moderated what they charge for cat prices, but he doesn't expect to see any price reductions. "The major problem is the sheer level of exposure; in an area like Houston, how much can an admitted company pay without compromising surplus?" he asked. Ray estimated that he has seen price increases in the double digits during the past 5 years.

"And I'm not convinced the full effects of Sandy have been felt in the marketplace," Ray said. "Admitted companies are still trying to find out what levels of rates they need or are acceptable to regulators. We might see continued rate tightening over the next 2 years in areas hit by Sandy."

Experts in other lines of high-risk coverage say they're seeing similar rate increases and increased retentions, even in well-established specialty lines like D&O, as claims have caught up with years of lower pricing.

The D&O marketplace for private companies and non-profits is in "a period of transition," said Steve Hunziker, executive vice president of specialty insurer SH Smith & Co. Inc. "The long-time, long-term players have seen their profits eroded by increased claim activity and as they look to increase premiums and retentions, the next generation of players is stepping in to fill the void as there still exists an abundance of capital. Typical renewal premiums are rising on the order of 10 percent to 30 percent, depending on the risk, with retentions increasing as well."

Pricing increases are spurring another trend: overshopping by nervous insureds and their agents, said Chris Christian, CIC, RPLU, vice president/senior broker at US Risk Brokers in Nashville, which specializes in professional liability.

"Insureds are putting tremendous pressure on their agents--or agents are taking a defensive position in anticipation of competition--and instead of shopping the market thoroughly every 3 years or so, they're going out to market every year, and looking for multiple quote options annually," she said. This trend causes "underwriter burnout," evidenced by underwriters refusing to quote these excessive submissions. "It takes great restraint, a lot of education, and a lot of trust between the insured and agent, or the agent and wholesaler, to avoid falling into this trap."

This trend is causing a "ripple effect" as overwhelmed, understaffed carriers focus on "top-line or bottom-line growth," Christian said. This harms insureds because subtle or complex issues or potential overage gaps are missed by the underwriter or the broker.


Because of the onslaught of recession-related claims, "It is safe to say that D&O carriers have been confronted by types of claims that they never envisioned," said Dennis Donovan, executive vice president at SH Smith. In turn, carriers are reevaluating the scope of coverage and pricing, including refining underwriting guidelines, coverage wordings, and rates. Some have exited industry sectors like car dealerships, hospitality and other service industries, while others are paring or eliminating coverage for wage-and-hour claims or imposing bankruptcy exclusions.

Other carriers are looking to apply their high-risk coverages to specific lines of business, such as in the area of cyber liability.

When cyber liability policies first became available in the late 1990s, the coverage was designed to be distinct from professional liability coverage and to cover the gaps left in a general liability policy, said Lamprecht of Big Data Insure. And although not quite mainstreamed, today about 35 markets market the product, "offering one policy they sell to everyone, whether it's a bank, retailer, or whatever," he said. "Making that coverage work for different entities is time consuming, and can actually increase risk."

Yet each business sector's cyber liability exposure is unique. For example, although retailers are hacked for their PII data to sell on the black market, cyber crooks targeting law firms look for financial statements, information on mergers and acquisitions, and other information that's not subject to the same laws as PII, Lamprecht said.

Carriers are beginning to recognize these distinctions and are building cyber policies to reflect the differing needs in different industries. "At one point, professional liability was all miscellaneous, before it evolved into different niches," Lamprecht said. "We're beginning to see that in cyber." For example, insurers are adding more endorsements to standardized cyber policies geared toward specific industries like financial institutions, healthcare and lawyers. "It starts with endorsements and ends as a stand-alone policy," he said.

For agents and brokers specializing in high-risk exposures, the message is clear: have a deep understanding of your insured's business, as well as the appetite and offerings of the carriers that serve them. "Our most successful brokers invest in understanding the inner workings of educational institutions, providing the right mix of carrier resources and insurance, and really focus on selling value," said Bryan Elie, vice president of underwriting at United Educators Insurance in Chevy Chase, Md. "Educational institutes in general are value buyers. They look for the right mix of price and value. Brokers who understand that mentality will be the most successful."

More on the Web:

> Lloyd's Survey Shows Taxes, Cyber Threat as Top Risks of 2013

> Top 5 Questions clients Ask About cyber Liability

> Medical Malpractice's pair of Pain Points

Read these related articles at


Anatomy of a Risk: Lawyers' Cyber Liability

Over the years, Michael Lamprecht, president of Big Data insure, has developed standalone cyber liability policies for online security broker/dealers, financial institutions, healthcare companies and technology companies. "lawyers are the most difficult, but I've gone out of the way to create products for people I work with so they won't have to try and customize every policy that comes through the door."

Because many businesses, especially smaller ones, don't even see the need for cyber liability coverage, specialized policies are an easier sell than generic forms. Lamprecht remembers calling on a legal customer about a year ago to give a presentation on the firm's need for cyber coverage. The lead attorney looked at the application and commented, "Our industry isn't even listed on the application. Why would we even need this coverage?" Taking the hint, Lamprecht developed a law firm-specific cyber policy that addresses the gaps between cyber and lawyers professional liability coverage.


(1) Some lawyers' professional liability policies provide small islands of coverage for cyber risk, creating coverage overlaps and conflicts between the cyber and LPL policies. Lamprecht uses a flexible difference in conditions structure that provides primary coverage for cyber risk claims where the LPL provides no coverage, excess coverage when the LPL covers the claim, or co-primary coverage when the LPL policy provides some but not full coverage for a cyber claim. This structure dovetails coverage and helps reduce situations where the policyholder has to pay two deductibles for a single incident.

(2) in addition to the typical privacy regulatory coverage associated with PII, lawyers need expanded regulatory and additional disciplinary proceedings coverage for current and emerging rules and regulations for data breaches, such as those of the American Bar Assn. Using the legal, ethical, contractual and malpractice obligations law firms are subject to as a starting point, Lamprecht then went even broader because many law firms working for healthcare companies or financial institutions could also be subject to HIPAA and GLBA regulations.

(3) Typical cyber liability exclusions like pollution can unintentionally exclude coverage for law firms providing services to related industries. Cyber policies specifically designed for law firms have those exclusions carved back to create the needed coverage.

(4) Crisis response coverage for lawyers must go beyond the basic notification and credit monitoring provided by generic cyber policies. A law firm that unintentionally discloses confidential client data may have legal, ethical, contractual and malpractice obligations to consider and may need to take additional steps after a breach, such as filing motions on a case to prevent stolen data from being used against their clients. Underwriters give typical clients access to a "breach coach" to walk them through the notification, call centers, credit monitoring, etc. Law firm breach coaches must understand the specific obligations of law firms so they can properly advise the firm. And because law firms are very focused on brand name, Lamprecht usually builds in broader PR coverage for data breaches.

(5) Business interruption. The typical net income before taxes plus continuing business income model used in many cyber policies won't work for law firms because it only pays for lost revenue from services that would have been performed, billed and paid during the restoration period. Law firms can take a long time to perform a legal service, issue an invoice and collect the fee, so carriers may estimate system downtime as a zero-dollar loss. To amend the traditional cyber policy, Lamprecht converts the business income section to a "loss of billable hours" model, with larger extra expense limits and a 1- to 2-year business interruption agreement.
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Title Annotation:HIGH RISK
Author:Toops, Laura Mazzuca
Publication:American Agent & Broker
Date:Oct 1, 2013
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