Which professional lines business is seeing significant growth?

Dan Mogelnicki, Senior Vice President, Professional Lines, at Tokio Marine HCC Cyber & Professional Lines Group, joins IBTV for an overview of the professional lines space. In this interview, he delves into the outlook for 2023, gives an example of a line of business that is showing distinct growth and talks about the importance of risk management solutions.

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Paul: [00:00:07] Hello, everyone, and welcome to the latest edition of Insurance Business TV, A Professional Liability special brought to you in association with Tokio Marine, HCC, Cyber and Professional Lines Group. In this video, we're going to be providing you with an overview of the current marketplace, showing you where the opportunities lie and delving into what level of customization can be applied to the sector. Indeed, it's been quite the period for professional liability, hasn't it? The market has gone through a continuing hard phase with rates increasing across several business areas. That of course has created increased pressure to zoom in on clients needs. But is it possible to deliver sufficient capacity at a time when so many are pulling back? Well, to give us his overview of the market, I'm delighted to welcome Daniel Mogelnicki. He is the senior vice president of Professional Lines at Tokio Marine, HCC, Cyber and Professional Lines Group. Dan, welcome to IBTV.

Dan: [00:01:09] Thank you very much. I'm delighted to be here.

Paul: [00:01:12] So let's start by getting that overview if we can. Let's look at the state of the professional liability marketplace. So if you don't mind, Dan, just give us a little bit of an insight into how 2022 ended and and what's on the outlook now that we're firmly into 2023.

Dan: [00:01:30] Sure. You know, there are three points that dominate the outlook profitability, staffing and service. From a profitability standpoint, overall, it looks like the segment did fairly well in 2022 with certain exceptions. We did really well in 2022. In fact, a record year for profitability for professional lines at. At the Cyber Professional Alliance group. Currently we see rate increases starting to moderate, though, now edging to the low single digits. I think this is a sign that carriers are feeling pretty comfortable at this point with the rates that they've achieved. There is ample capacity with at our last count. I know I've got approximately 50 known professional alliance market that we compete with regularly utilized by the producer community. However, there are certain areas where carriers have shown some negative results. We just heard back just this week heard of a major lawyer's professional market withdrawing entirely from the class. That's a sign of some troubling issues as well. Late 2022, we did hear of a couple of professional lines, MGAs that only at the very last minute were filling out their carrier commitments at the year end for the 2023 year. And then ironically, you know, while generating some of the larger claims within professional liability, architects and engineers seems to be the most competitive sub segment. Well, with the exception of structural engineers and geotech risks in higher exposure states. Now, I also mentioned staffing as an issue. Really important because the professional lines industry as a whole has suffered with some turnover among other reasons, you know, with the growth of the cyber industry, a large portion of the existing professional lines underwriting staff has actually been hired away to go into the cyber segment. That plus the never ending shortage of people coming into the industry. That's always been problematic and it's probably going to get worse with an over with over an estimated 25% of the industry currently at or near retirement age within five years. I'll tell you what, it's been a great couple of years for the recruiting industry. And believe it or not, I am personally involved in recruiting high school kids to come into the industry. I think we got to start them young. Through my relationship with the Saint John's University Greenberg School of Management. And then the staffing leads to the third issue having to do with the current state of the market, and that is some service issues, staffing challenges combined with the expectation of instantaneous turnaround from the producer bases. It's really the most common challenge that I hear spoken about when I speak to others that are in my space in the industry. When we get together at various events, we always talk about staffing, at least the service, and think that in some instances is going to remain a bit of a challenge for 2023. But you know, carriers that will do well in 2023 will be those that are financially strong, enabling them to make investments in staff and and systems to increase service levels and ultimately underwriting profitability. And as for our group, we are utilizing our financial wherewithal, making historic investments in 2023 and in both staffing and systems.

Paul: [00:05:23] I think that's a terrific overview of the market and so many great points. One that stood out for me was when you talked about the the business lines that are perhaps going through a particularly difficult time. But if you don't mind, I want to sort of flip that on its head and ask you, is there an example out there of a business line that is perhaps showing some growth in the professional lines area?

Dan: [00:05:45] Definitely. It's funny. Just yesterday I was driving down the street and I saw a a contractor's van with signage on it indicating that they were a remodeling and construction outfit. Design build has been a thing for a couple of decades now. Some firms I'm talking about contracting firms doing design build as a separate practice within their operation and others doing it more informally. But the instance of those firms buying professional liability for the design work. Has not matched the growing exposure. So as more more contractors get get into the design area. Well, they're not really buying professional liability to the point that they should have been actual formal design build firms often hire an engineer or an architect, and those firms have been buying professional liability. And that has that has been a thing for really more than a decade. But there are many smaller construction firms that get involved in design work, even though they're not actual engineers. They take the contractor whose panel truck I saw just yesterday, you know, he's likely to come to your house and do, say, a kitchen remodel. Now, these companies have not traditionally bought professional liability, thinking that their completed operations coverage under their GL under the general liability policy will cover them. Well, this really is is a mistake. And we know of many instances of claims being submitted to carriers having been denied completed operations would cover resulting BI or PDE from the negligence in their actual construction work itself, but does not cover claims due to faulty design where the work was actually done correctly. In accordance with that design, this remodel guy, he may come to your house, expand the kitchen, maybe break down a wall to extend the room and install a header to take the bearing load. So let's say he does all the work properly. No negligence in the actual construction. But he miscalculated the bearing load and the house ends up sagging. Well, the homeowner is going to bring a bring a claim and this is likely not going to be covered by the general liability completed operations coverage part. And the claim will likely be denied by that carrier. This is actually a professional liability exposure. We recently had an actual claim where a general contractor hired an electrical subconsultant to provide design services for the installation of lighting fixtures. Now our insured is a general contractor. Turns out the lighting fixtures caught fire. The cause was determined to be a design error that subconsultant, a general contractor hired, did not carry professional liability insurance and and refused to respond and claiming he was going out of business. Luckily didn't have any insurance. Our professional liability policy for the GC paid to have the lighting system redesigned and repaired. That general, that general contractor that we ensured that we had a professional liability coverage for was vicariously liable for the for the design error of his subcontractor. So for the many brokers and agents that might be listening, who have contractors as clients placing their general liability, their auto, their worker's comp, their inland Marine, you would be well advised to further protect your insured by securing a contract as professional policy. This not only gives further protection for the insured, but keeps you insulated from a potential lawsuit from your client who's going to be upset at potentially having a circumstance not covered by insurance. It's also a good way to round out the coverages and protect yourself from criticism from competing brokers. And, you know, this is this is really an education issue from both the insured standpoint and the producer standpoint that's now. Now we are seeing and in direct answer to your question, Paul, an increase in submission activity due due to the greater awareness of that need. I still think that there's room for increased awareness of this exposure. I would doubt that there is more than 30 or 40% of contractors that buy professional liability insurance that do get involved in some sort of design. And, you know, we've been offering this coverage for a long time now, and we're prepared to react swiftly with a policy designed specifically for these exposures. It even has a special coverage carve back, essentially providing coverage for what we call faulty workmanship that gives back what the policy excludes in the damage to your work exclusion for those insurance producers out there that are placing coverage for contractors, You know very well what the damage to your work exclusion is. This coverage on our policy actually kind of gives that back even though it's not purely PL, but it's a nice perk to have.

Paul: [00:11:21] Yeah, love that sort of real world example. Thank you very, very much. Um, if you don't mind though, I want to sort of broaden the topic a little bit because we hear all the time now that brokers in a lot of ways are selling risk. They need to be able to provide risk management solutions as well to their clients. So just give us some insight here. How important are risk management solutions to the professional liability buyer?

Dan: [00:11:45] You know, professional lines is not like, say, property coverage, where a physical inspection can result in risk management solutions. By improving the physical protection, you know, professional, you know, professional liability covers mainly pecuniary loss resulting from duties imposed via contract. Now that's why we provide contract review. That's a big part of our risk management and others, you know, other carriers too. And having we have attorney attorneys available to take a look at the insurance contracts, make sure they're building in proper protections in the instance of architects and engineers or contractors, professional will look at the contracts that they enter into with their insurers or with their clients or upstream contractors to provide a high level review, to safeguard, to safeguard that the insured is not compromising their insurance coverage. So contract review is one of them. Another example is on our employment practices product. We're focused on, you know, selling more than just an insurance product, but also providing risk management services. Ours is called pilot. These are risk management services that are available to all policyholders. At no additional charge includes comprehensive services such as unlimited HR support, step by step procedures for, you know, some commonly occurring issues and and employment law updates. So, you know, most of the risk management that is provided to to the clients really come more in the form of counsel or advice than any other mode.

Paul: [00:13:33] Yeah, I appreciate your insights. And if you don't mind, I'm just going to throw one more. Again, quite a broad question your way, but we hear all the time, don't we, in the insurance market now about the the importance of customization. But I'd like to know is does the professional liability marketplace really suit that sort of customization on an account by account basis? And and if so, to what extent, Dan?

Dan: [00:13:56] The Professional lines segment is really diverse. You know, there are so many services provided by the by the insureds that typical by professional liability insurance, you know, could be health care professionals, health care, professional organizations, consultants, lawyers, accountants, insurance agents, medical billers, real estate agents, appraisers. You know, there's tons of them. Um, they're so diverse. But the standard boilerplate policies may not address every situation that could arise with all of that diversity of different types of insurance. So that's why we employ a team of what we call product development specialists. So a highly experienced team of professionals who really know the policy wording in and out. And they're there to assist our underwriters in crafting specific endorsements to address unique exposures, individual exposures that may come up on various types of risks. You know, our brokers, our customers and their insureds. Um, you know, they can come to us and give us a certain situation that maybe isn't isn't ordinarily presented for the normal type of a consultant or, or architect or engineer. And, you know, I'm an underwriter at our company. We have lots of really good underwriters in our company. But, you know, I would not be personally, personally comfortable in writing coverage forms for an insured. And they may be another insured, another insured in addition to the usual duties that I perform as an underwriter. So, you know, the fact that there's the availability of a separate resource that's able to do this, it really does two things. It helps us as a company, but it also helps to protect the insured and also help to enable the broker to better service their client.

Paul: [00:15:56] Yeah. A massive thank you. Dan, you've shed some light on what is such a difficult and evolving marketplace. No doubt there'll be a lot to talk about as the year rolls on. My huge thanks to Dan and to Tokio Marine, HCC, Cyber and Professional Lines group. And we'll see you all next time right here on Insurance Business TV. Thank you.