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What are the best strategies to help PL clients?

Michael McLachlan, president at Trinity Underwriting, celebrates the company’s recent 5-Star Professional Liability award. In this interview he looks at how the pandemic impacted the product, the challenges in the market in 2022 and the best strategies to help clients.

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Surina: [00:00:11] Hello and welcome to IBTV. I'm Surina Nath, news editor at Insurance Business, and today I'll be chatting with Michael McLachlan, president of five star professional liability MGA Trinity Underwriting about the evolution of the sector and trends to keep an eye on this year. Michael, thanks so much for joining us today.

Michael: [00:00:31] Thank you, Surina. Thank you very much for having me.

Surina: [00:00:34] Could you give us a general overview of the professional liability space and how it's evolved over the past few years?

Michael: [00:00:42] I think one of the most important things to point out is that is Lloyd's position in the professional lines market in Canada. If you look at the third quarter numbers that have been, those are the latest ones that have been reported. Lloyd's has a 45 percent market share in professional liability in Canada, and that's quite spectacular considering that there probably are about 50 or 60 companies that insure professional clients in Canada. And they get that business through a variety of ways and we can get into that. If your audience is interested, but they've certainly been a major influence and they've driven the professional alliance market in Canada in the last few years. It wasn't always that way. It used to be dominated more by subsidiaries of American companies and as reasons why it's evolved in that fashion. The historically professional liability, which I guess would include both what's commonly known as errors and omissions insurance, which tends to be financial loss and also medical malpractice. It's quite often included in professional liability. Historically, though, is the results when those lines have been pretty good. I would say over the long term, 30 40 percent loss ratio, so a good return for the insurers. In the last few years, those results have deteriorated, and many of many brokers and insurance buyers out there are upset and challenged by the fact that premiums have gone up quite a bit in the last couple of years. And the main reason for that is the results have got worse and therefore rates go up,

Surina: [00:02:24] And this hard market cycle that's already been a challenge has been exacerbated by the pandemic. So what have been the biggest impacts on this specific segment?

Michael: [00:02:34] You know, I have to say that surprisingly, not as much as we would have expected, for example, in our case back in the early part of 2020. Most professional liability policies are rated on revenue or fees. And of course, our insurance had no idea what was going to happen. And we had a lot of small SME type clients, management consultants, various professionals of all colors and stripes. And as an example, if they had previously done a million dollars worth of revenue in 2019, a lot of them forecast substantial reduced revenue in 2020 because they really didn't know what was going to happen. As it turns out, that they really didn't suffer that badly and the economy kept going, I think a lot stronger in the professional areas than people thought it would. So, so there were obviously other industries, for example, the hospitality industry that was severely affected, but professional lines, not so much. So I think a lot of people are surprised by that.

Surina: [00:03:48] Are there any anticipated challenges that are maybe not pandemic related that the industry should be keeping top of mind?

Michael: [00:03:57] Well, I mean, there's a general ongoing challenge with professional liability, and it's almost a it's almost a counterintuitive thing. And that is that as standards and professionalism improves, the expectation of the clients increases. And I can give a very simple example of that 40 or 50 years ago, if you had a heart transplant, there was a very good chance you wouldn't survive. And so the expectation was, you know, this may not work and and if it does work fantastic. So today, with the advances in medicine and everything else, I would I don't know the exact number, but I bet you ninety nine percent of heart transplant patients survive. And so therefore, even though the science has improved and the quality of the service is improved, the expectation has changed. So if if you don't survive, then your estate gets very upset and it leads to launch of lawsuits so that standards improve technology, you know, you know, a small service companies doing software projects. Ignoring cyber for a moment. But again, you know, 10, 20 years ago, it was the norm that if you if you if you hired an AI small I.T. consulting firm to do a job for you, it would take longer than they said it would cost more. But everybody expected that today you don't expect that. So service standards, expectations of service standards has gone up. So what you get in the industry is you probably get fewer claims, so you probably get a reduced frequency of losses. But when you do get a loss, quite often it's larger. It's not anything specifically to do with what's going on in the world, right? At this moment, it's kind of a continuous process.

Michael: [00:05:57] There's two types of professional liability. One way to look at it is there is if an error causes a physical loss. That's one type of professional liability, an example that would be an engineer who builds a bridge designs a bridge. The bridge is built and it falls down. So the substantial part of that loss is going to be physical injury and physical damage versus a management consultant who suggests that if you reorganize your operation in some fashion, your productivity will go up by 35 percent and you do that and you pay him his bill and your productivity doesn't go up by 35 percent. So there's no there's a financial loss, perceived financial loss, but there's no nobody's going to die because, you know, productivity didn't go up, you know? The I would say that there's been more inflation claims, inflation on the service side on the financial cost side than it has been. I mean, a bridge falls down, a bridge falls down. But these days, you know, there's so much of the Canadian economy is based on services and so many companies rely on on services. And I think that when you're a failure to deliver product or service that causes a financial problem for your client, the the claim is more likely to be significant than it was maybe 10, 15 years ago. And so that's a trend. Those, I think, are two of the two of the trends that we're seeing.

Surina: [00:07:32] And Michael, are there any strategies that could be used to really best serve clients moving forward

Michael: [00:07:39] For large groups and associations for people buying professional liability insurance through a large group or association? That association will, as part of its value added proposition to its members, provide them with risk management services and recommendations and so on. And there's usually some kind of certification and there might be continuing education requirements. Usually, the insurer will work with the association to provide those risk management tools for smaller individual companies buying insurance not as part of an association. One of the best and cheapest risk management tools they have is the application form that they have to fill in. It's frustrating for many brokers and insurers that they have to fill out a four or five six page application form to get professional liability insurance. But if they look at the questions that are asked on that application form, that is a fantastic risk management tool for them because the insurer obviously wants to know that information for a purpose and if if they're not doing something that the insurer thinks they should be doing. What better way of identifying it than than going through an application form? So, so that's, I think, the single easiest and most cost effective way for a small business to look at. A risk management strategy is look at the look at the questions the insurer is asking you

Surina: [00:09:02] And has the digitization of these application processes made it easier for both brokers and insurance?

Michael: [00:09:09] Yes, I think it has probably in our lines of business, not as much as you would have hoped as a consumer. The I think it naturally started in areas like personal insurance, personal auto and so on. And it's very, very good for transactional coverage. You know, pay, you know, use a pay insurance if you want, if you want insurance for half an hour because you're renting a hockey rink. It should be completely digitized. We're getting there. I think we are getting that. I think I don't see that if for an insurer writing a piece of business professional liability policy for the first time, if they're not familiar with the risk, they're still going to want to ask a bunch of questions. So whether you fill them out on a piece of paper online, you know, online, I guess is easier. Where we should start to see some real advances is on renewals. I think insurers and brokers rightfully get very upset when they have to fill out another five page application a year later, because most small businesses haven't changed much in 12 months and in that process could be very much better digitized. And we have all the information we need or we need to know is one or two things that might have changed. So I think you'll start to see some real progress in that area in terms of ease of use and and the ability to get. I would just one note of caution. If you can go online and you answer three or four questions and that's all you need to do in order to get a quote from an insurance company. Do they really know what you're doing with three or four questions? How can they possibly understand your business? So when you have a claim, you'd better be sure that there's no confusion. So be prepared to answer some information at the front end, but quite rightfully, take a stand that you shouldn't have to answer those questions year after year. Your insurer should know what you do

Surina: [00:11:09] In moving into 2022, 2023. What should insurers really be paying attention to?

Michael: [00:11:15] So I don't think there's been a lot of change, if much at all in legislation or in new laws passed in Canada that impose greater responsibility on professionals. So I don't see a lot of changes there. I think that where we are seeing changes is in the peripheral areas. You know, cyber is a different type of coverage. It's broken out separately. There's a lot of concern about cyber on all sides, but it's more of a first party coverage. It's not really a professional liability coverage. The example I would use, which is an odd one, is a ransomware attack on your company. It's probably the equivalent of 20 years ago, somebody coming up to your warehouse in the middle of the night and changing the locks on the door so that when you got there in the morning, you couldn't get in. Obviously, that's a bit of a farfetched example, but it's a first party, a first party claim for technology companies, for anybody providing any sort of service that is supposed to protect you against cyber attacks. That's a that's a that's a legal liability exposure and that would be normally covered under their professional license policy. So therefore, yes, for those type of companies as being a big increase. And, you know, I've always said. I'm biased because most of my insurance carrier, I've worked on liability and the liability side rather than the property insurance side. I've always said a property policy is just a policy to make a deposit payment until you find out whose fault it was and then you get them to pay you back. So a cyber policy, you pay the ransomware and then you find out who designed your tech system and why was it so easy for somebody to get in and hack you and then you go off to them? So from that perspective, yes, professional liability exposures have increased because of what's going on in the cyber world. That would probably be the main exposure, I would say at the moment.

Surina: [00:13:10] Are there any other exposures now that the pandemic is hopefully behind us that the industry should be considering?

Michael: [00:13:17] Well, we haven't talked about directors and officers liability at all. We focused on professional liability, and I know that there is a concern that there's going to be a wave of claims coming in on the COVID related claims for directors and offices that that they have not insured, that their company has taken sufficient steps to protect people against against COVID or perhaps business practices. They didn't take sufficient steps to make sure that their their company, the revenue was sufficiently protected. We'll see. I mean, there's a lot of talk that's going to happen. We'll see if it happens or not. The as far as COVID exposures on professional liability, we ensure a number of sports related risks and they buy regular liability insurance. They also buy professional liability if it's an association, and we were fairly comfortable with providing them with COVID cover in the early stages of the pandemic because they didn't, they didn't create the virus. It's they weren't working in the basement creating the virus, so as long as they follow the established practices that are put in place by whatever government agency it is, their liability should be fairly minimal. So so we're quite comfortable with that exposure. Back to Dino for a second director. You know, there is a big concern now about social and governance and what's commonly known as ESG exposures. Environmental concerns. Companies need to be more concerned about caring for the environment and caring about social trends such as diversity and so on. And yes, I think we will start to see an increasing number of claims in in those areas and, you know, environmental impairment liability historically being very profitable in Canada, pollution liability. But I think you're going to see more and more responsibility thrust on companies that are in fact polluting the environment. And and I would expect losses in those areas would increase in the future years,

Surina: [00:15:38] All very critical aspects to keep an eye on moving forward. Michael, thanks so much for joining us today.

Michael: [00:15:46] Thank you very much for inviting me. That's very enjoyable, I hope. I hope some people get something out of this and that was thank you.

Surina: [00:15:55] Thanks for tuning in to IBTV. I'm Surina Nath. Until next time.