Law firms, like many other professional service providers, have seen the boom and bust of errors and omissions insurance pricing. The early 2000s saw their potential insurance providers drop to the single digits only to grow five fold in the following ten years.
A firm now has a tough decision to face – whether to jump to an upstart insurer to save money. The answer isn’t as easy as it seems, but the price difference and any coverage disparities should be considered. As any lawyer who practices insurance defense knows, a policy is only a piece of paper if the coverage grants and exclusions are not properly constructed.
The first thing buyers should look at in a potential malpractice insurer is size. The bigger an insurance company is the better protected you are against catastrophic losses ravaging the company. The measurement used is policyholder surplus. Surplus, for short, is a measurement of assets remaining after all expected claims are covered. The bigger the surplus, the better.
Another consideration is leverage, which is a complex topic better generally measured by the premium to surplus ratio. The higher this ratio, the more leveraged the company. A premium to surplus ratio of less than two is ideal. The lower the ratio the less leveraged the company is. The major lesson from the recent recession, which AIG can attest to, is that too much leverage can quickly hurt a financial institution.
Another consideration is what lines of business the company writes. Diversification is generally a good thing as writing uncorrelated lines of business can help reduce volatility in claims for the insurance company. With the recent financial crisis pushing companies to act more responsibly the market has seen general carriers and specialists in things like medical malpractice move into law firm professional insurance. These diversifying firms generally have a restricted appetite for risk and only are willing to write a mundane firm.
A metric that ties this all together is the financial rating of the firm. S&P, Moody’s and Standard and Poors provide ratings but they are only for the debt issued by the company. If looking at carrier strength there is not another option from AM Best. AM Best provides two ratings for each firm – a financial strength rating and a size rating. Most brokers lead clients to accept insurance that is rated A- or better, although some are OK with a B+ rated carrier. If possible, it is preferable to use an A or better carrier. The second rating, for size, is a direct measurement of surplus. If possible use a carrier with at least one billion dollars in surplus.
In conclusion, law firms have an excellent problem at the moment, they have to decide how much money they want to save. Small, highly leveraged insurance companies are forced to undercut the pricing and terms of their large competitors. Most law firms buy admitted coverage and should not have too much concern buying insurance from highly regulated insurance carriers. However, it’s often worth paying a little more for a larger and more established insurer who you know will be around for renewals to come.
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