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RISKVUE ARCHIVE | INDUSTRY WATCH > EMPLOYMENT PRACTICES LIABILITY (EPL)
The EPL Market: Where It Is, Where It’s Going
Purchasing Habits
In recent years, business, industry and public entities have become more aware of the potential for catastrophic loss from employment-related litigation. This heightened awareness appears to have motivated a larger number of employers to purchase coverage for employment practices liability. This is in contrast to previous years, when insurers and brokers reported a large number of insurers inquiring about EPL insurance, but with few sale-20% of all proposals.1 This compares to reports of 5-10% in 1996, when we conducted an informal telephone poll.
Although brokers and insurers both report increased interest in EPL insurance by employers, the percentage of organizations actually purchasing EPL insurance still remains relatively low compared with general liability or other standard forms of business insurance. A 1997 survey of employers conducted by The Society for Human Resource Management (SHRM) and Jackson Lewis revealed that 22% of respondents reported purchasing EPL insurance.2 Insurers and brokers alike described the EPL insurance market as having huge potential for future sales.
Market Profile
The EPL Book began surveying EPL insurers in 1996. At that time, we identified 23 insurers actively writing EPL insurance, primarily in the form of a stand-alone product. Because some insurers offer more than one policy form, the total number of policies reviewed at that time was 30. In 1998, the number of insurers responding to our survey rose to 39, with 60 separate policy forms submitted and evaluated. The actual number of insurers writing EPL insurance is likely higher than our surveys indicate. We estimate that the total number of insurers that cover liability arising out of employment practices through stand-alone, D&O, general liability, umbrella, professional liability, and association and other specialty programs probably exceeds 60. Because many insurers offer more than one policy form, the number of different EPL insurance policy forms may well exceed 100.
While our survey response data was not definitive, it provides readers with a relative indication of market conditions between the two survey periods. The compiled data indicates that:
- The number of insurers writing EPL insurance that responded to our survey increased from 23 in 1997 to 39 in 1998.
- The number of different EPL insurance policy forms increased by 100% (from 30 to 60 separate policy forms).
- The total EPL insurance market capacity has increased over 140% in one survey period.
- Total EPL capacity, as measured by our survey, is at least $715 million and may be as high as $1 billion.
- The available median policy limit of $5 million has not changed.
Much of the increase in capacity is due to the addition of a second insurer offering single policy limits of $100 million and seven insurers offering limits of $50 million.
Pricing
Price competition has increased, with overall rates reported by some insurers dropping 10-20% per year over the past two years. Reasons include the following:
- Continued soft global insurance market
- Increased capacity
- Relative increase in supply versus demand
Some insurers expect prices to begin to flatten out beginning in 1999, but perhaps with slight increases for some insureds. If prices do rise, insureds with operations in high-litigation states such as California, Texas and Michigan will be impacted most. Some insurers say they may refuse to write new business in these states. Insurers also are likely to avoid public entities, professional entities, the entertainment industries, and other industries or companies with historically poor loss ratios. As more historic data is collected and gathered, insurers should be better equipped to actuarially underwrite the EPL exposure based on geographic location and industry.
While the outlook may be grim for some insureds with bad loss experience, even those in high-risk industries or geographic locations may still experience price decreases or at least stability. The essential factor will be how well these insureds manage the employment exposure using proven risk management techniques.
Coverage
Between the time of our first market survey (published in 1997) and now, many older EPL policy forms have been replaced with new versions. Some policy forms not replaced may be modified by endorsement to eliminate or limit the scope of certain exclusions. In both instances, current policy forms provide broader coverage than they did just a year ago. Most notable in new policy forms is fewer exclusions. Downsizing, class-action, punitive damages, breach of contract and other exclusions appear far less often today.
Changes in the scope of coverage are not only limited to a reduction in the number and breadth of exclusion. In some instances, coverage is available for exposures such as third-party liability and punitive damages.
While there has been an increase in the availability of coverage for employment practices liability vis-à-vis the addition of such coverage to D&O, umbrella, general liability and other policies, the market for stand-alone products remains strong.
Conclusion
After many years of limited interest, EPL insurance is being accepted by a growing number of employers as a necessary business insurance policy. While prices have been in free-fall for the past two years, many insurers predict stability at least for the short term as markets seek a reasonable balance between broad coverage and reasonable pricing.
Many sources we spoke with acknowledged that any major changes in pricing and coverage would likely reflect greater reliance on historical losses and other actuarial data as insurers become better able to determine the adequacy of their underwriting and pricing. 
Notes
1 A recent CPCU Journal article reported insurers writing between 5-15% of accounts quoted.
2 The actual percentage may be higher, however, as 30% indicated that they did not know whether the organization purchased such insurance.
riskVue | The webzine for risk management profesionals
May 1999
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