The market for lawyer’s professional liability (LPL) insurance is like any other market in that the price for the product is determined by the principles of supply and demand. But what are the factors that are unique to the LPL insurance market?
In the insurance world, either the market is deemed “hard,” meaning that premiums are high and coverage is limited, or “soft,” meaning that premiums are low and insurers offer coverage freely. In general, three variables affect the “hardness” or “softness” of the LPL market.
First and most obviously, claims affect the market’s character. If clients assert more claims against lawyers (referred to as frequency), or if insurance carriers have to pay claims of higher amounts on average (referred to as severity), then the cost of LPL insurance will rise.
The second variable affecting the LPL insurance market is interest rates. In insurance jargon, LPL insurance has a “long tail,” which means that usually a carrier doesn’t actually pay a claim until several years after the carrier collects an insurance premium from a firm. During this “tail period,” an insurance company invests the premium that it has received. If interest rates are low, then the income generated is likewise low. In those circumstances, an insurance carrier has to rely on its underwriting activities to make a profit. In other words, carriers typically make up for poor investment income by raising premium rates, decreasing coverage, or both.
The third variable that affects the LPL insurance market is the amount of surplus capital in the overall insurance market. Surplus capital increases as insurance carriers generate positive income and choose to keep it in their companies as retained earnings instead of paying dividends to their stockholders or policyholders, as the case may be.
Kevin J. Sullivan, CPCU, RPLU, is the program manager for the LawyerGuard program, having been in the professional liability insurance industry since 1985. Additional information regarding the LawyerGuard Program can be found at www.lawyerguard.com. Kevin can be reached @ (860) 756-7417 or [email protected]. For over 25 years, DRI has sponsored LawyerGuard for lawyers’ professional liability insurance for its membership.