Aberrations for Certain Coverages Create Problems for Insureds and Underwriters Alike

December 11, 2003

As the property and casualty industry begins to settle into more stable pricing, there continues to be aberrations in certain coverages. D&O, medical malpractice and workers’ compensation are among the coverages which continue to create pricing problems for insureds and underwriters alike.

D&O is now almost impossible to properly underwrite. There are many new perils arising from financial malfeasance, many of which underwriters simply could not have anticipated. We expect coverage conditions will be amended accordingly. A new policy form should be forthcoming shortly.

Medical malpractice coverage is just plain scary. Some states have passed legislation which limits liability for physicians but plaintiff’s
counsel is busy figuring out a loop hole. A creative solution for insuring medical malpractice will most certainly be developed by one of the large brokerages or a specialty D&O underwriter.

Workers’ compensation is a real challenge for politicians and insurance commissioners, particularly in California, New Jersey and Florida.

Problems are arising in other states as well and as a result, many publicly traded insurers are limiting their volume or pulling out of underpriced states completely. Quite a few states have implemented
aggressive state sponsored workers’ compensation pools or funds. The loss experience in these funds is relatively green. As the claims
mature, these “insurers” will suffer from significant underpricing and underreserving.

Hopefully, the standard stock companies such as AIG, ACE and others will be willing to step in and pick up the slack. State sponsored programs should take into consideration the immense intellectual capital and underwriting acumen of the major carriers who are still providing workers’ compensation coverage. It’s pretty tough to outsmart these large insurers. So, if they are charging $1.00 and the state sponsored “insurer” is charging $.60, something has to be amiss.

Many of the state funds have only recently started to take a major market share. Soon, they will begin to suffer from underpricing. But,
they always have the taxpayer to bail them out.

Richard Kerr is chairman and CEO of MarketScout.

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