E&O: Errors & Omissions

Actuaries Professional Liability

Opportunities

Providing professional liability for an actuary, or an actuarial consultant, can be a challenging and rewarding experience. The market for professional liability (E&O) insurance for actuarial consultants is not soft. Most professional liability insurers will not consider actuaries, and the few that do are attempting to control their exposure through restricted coverage. Professional liability coverage for an actuary can so restrictive as to be ineffective.

The Profession

An actuary is an insurance professional trained in evaluating the risk, or projecting the probability, of future events, and quantifying the financial implications of that risk with respect to insurance and pensions. Actuaries use a variety of quantitative models based in part on probability theory in their analyses. Two primary functions they perform are calculating the value of loss reserves and developing insurance rates.

Exposure

Why the tight market? Primarily from the exposure arising out of insurer insolvencies and under-funded pension plans. Underwriters are nervous about the exposures from third parties when there are not enough funds available to pay the bills.

In particular, underwriters are concerned that actuaries are, in effect, being asked to guarantee results. There can be an expectation on the part of clients and third parties that the projections will be correct despite any qualifications. There have been a number of cases where clients, and insurance departments, have pursued actuaries for reserve projections that turned out to be inaccurate.

One of the services that actuaries provide is an educated, professional estimate of reserves at a point in time, and inherent in that estimate are a reliance on client information and an understanding that "things" change over time, like the legal environment. Actuaries cannot be expected to predict the future, only to estimate it.

Professional Liability Insurance

There are two or three markets that will provide professional liability insurance, sometimes called errors and omissions or E&O insurance, for an actuarial consultant. They thoroughly underwrite the business, looking at the type of work, clients, states clients are domiciled in, client engagement agreements and a variety of other factors before providing terms. The coverage provided is reasonable and consistent with professional liability coverage for other professions.

There are a few other underwriters that will provide insurance with severely restricted coverage. While the pricing may be attractive, the coverage is not. One method used by these underwriters to restrict coverage is to exclude coverage for actuarial opinions or reserve certifications, or to exclude any claim from insolvency. This is not a recommended approach since the coverage being excluded is what most actuaries need.

Specific services provided have an impact on the terms provided, particularly the provision of actuarial opinions and reserve certifications. Analysis work and rate-making are considered less risky.

Coverage is typically provided on a claims-made basis. Limits and deductibles vary with the size and type of insured. Standard limits for most small to medium sized organizations start at $1.0 million. Policy forms vary, but typically are claims-made forms with defense costs included within the limit and deductibles.

Examples:

Mercator has provided proposals to a wide range of consulting accounts, including consultants specializing in the following areas:

Mercator Risk Services provides coverage for a wide range of insurance professionals. Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

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