Professional liability is changing to meet the needs of the 21st century.
As the world grows and becomes more complex, so professional liability is taking an increasingly important role within the global economic system. This changing position galvanised the PLUS Foundation, part of the Professional Liability Underwriting Society, to commission a research study into the issue.
Dr William Feldhaus and Dr Robert Klein, both from the Center for Risk Management and Insurance Research at Georgia State University, conducted the study, Professional Liability in the New Economy. They looked at the changes in demands for professional liability insurance which have developed as a result of the increased use of information technology (IT) and the growth in service industries. The move towards technology – and service-based economies is changing the profile of liability risks, as well as making them more complex.
A ‘professional' is defined as someone who has great skill, is an expert, is a skilled practitioner and conforms to the standards of their profession, and individuals and firms using a professional's service expect certain standards. When these standards fail to be met, a claim for damages may ensue.
Recognising this potential exposure, most professionals buy insurance coverage, in addition to implementing risk management techniques to lower their exposures. But the unique nature of professional liability exposures mean the market is very different from general liability.
This is a result of several factors, not least the increasing complexity in the economic and legal environments, which are resulting in greater uncertainty in many areas of professional liability. In particular, the medical malpractice and directors' and officers' arenas are looking increasingly litigious, and there is little doubt that insurance premium rates are to increase fairly substantially in these sectors.
General economic trends
The growing reliance on IT and service industries is supplanting traditional property risks with new risk exposures. IT failures, including security lapses, can have devastating consequences for businesses and their clients, increasing the potential for litigation against both the organisations involved, and the individuals who designed, installed and maintained the systems, New professions - financial planning and IT consulting, for example - require new types of professional liability insurance, while the role and risk exposure of more traditional professions such as medicine, the law and public accounting are changing. And as these professions mature, individuals within them become more and more specialised, and the insurance covers for them need to reflect that specialisation.
In particular, healthcare professionals are increasingly looking towards more comprehensive professional liability insurance. “This is both the best of times and the worst of times for medicine in the US,” said the report. “Rapid advances in medical technology have been remarkable in terms of the conditions that can successfully be treated and the ability to prolong and improve the quality of life,” it said. “At the same time, these advances, along with other factors, have greatly increased medical cost pressures and raised consumer expectations for successful outcomes.” They have also led to increased liability exposures for the medical providers.
In the legal professional indemnity arena, several factors are impacting, with potentially detrimental effects. The large number of lawyers compared with the number of clients, the growth in services offered by legal firms, and the financial problems faced by many firms are all changing the profession's risk exposures. Some of these factors, such as firms offering a broader range of services which may now include accounting and financial planning, could lead to conflicts of interest, and the organisations - and ultimately their insurers - need to ensure their coverages interact sufficiently to deal with these issues.
Growth in professions
Recent years have seen the numbers in certain professions skyrocketing. For example, between 1983 and 1999, there was a 50% increase in the number of accountants and auditors in the US, while lawyer numbers showed a very similar development. The number of architects increased by an astonishing 88.3%, physicians by 38.7% and other health professionals by 58.9%. This is all compared to total employment growth of 32.4%.
On the financial services front, the number of security brokers and dealers in the US jumped over 50% between 1990 and 1997; real estate agents and managers increased 34% while insurance agents and brokers marginally increased by just 1%. This, said the report, indicated “that E&O coverage for insurance producers does not appear to offer the same growth opportunities, although financial planning is a burgeoning area.”
Professional liability is a minefield legally, subject to complicated and constant changes. There is clear evidence that US litigation is growing faster that the overall economy. The number of tort cases commenced in the US courts rose 17.3% between 1995 and 1998, while the number pending shot up 60.6% in the same period. Changes in the operations of the legal system, including contingency fee lawyer reimbursement and citizen juries, have had quite strong implications for medical malpractice liability. Other factors influencing it have included new loss trends driven by innovation and new technology, increased agreement on defined standards of care, the spread of medical malpractice insurance, and the unique nature of tort pleading in the US and the broad range of causes of action.
These have all helped increase the level of medical malpractice litigation in the US, where one study identified median jury awards had lifted 46% between 1997 and 1998, to $755,530, and another showed that the frequency of medical malpractice claims over $1m is on the increase.
Unsurprisingly then, the biggest market for professional liability coverage is medical malpractice, which was responsible for premiums totalling $6.3bn to the licensed/admitted insurance market in the US in 2000. Ten years before, premium income was $1bn lower. According to some insurance experts, about 50% of medical malpractice cover is written by insurers that do not fall into the licensed/admitted category, thus the premium income is likely to be substantially higher.
Within the admitted arena, the somewhat modest growth over the 1990s is at least partly a factor of the soft market towards the end of the decade. “When financial data become available for 2001, we may see a greater increase in premium volume because of recent rate hikes,” commented the report's authors. “Also, some medical service providers may be opting for alternative forms of risk transfer and higher retentions that would not be included in reported premium figures. It should be noted that the enactment of the federal Risk Retention Act in 1986 has had a significant impact on the industry in terms of facilitating the formation of risk retention groups and purchasing groups that provide medical malpractice insurance and other types of professional liability coverage.”
Overall, the report finds that the professional liability markets are “competitively structured, with information being the primary barrier to entry and sustaining operations.” An influx of capacity has made these areas extremely competitive, and loss costs in certain lines because of increased litigation and other economic factors are taking their toll. As the effects of these factors begin to hit, the report's authors foresee insurers either changing their underwriting practice or leaving the market. “Anecdotes suggest that prices are beginning to firm, but the landscape is not uniform and buyers' experience will vary. Over the long term, the shakeout of less efficient or knowledgeable insurers should contribute to consolidation and more stable and adequate pricing.”