Higher premiums a threat to advisors covered by CAIFA’s new errors and omissions plan

By Martin Beaudry | March 20 2002 07:01PM

As if an increase of 300% in premiums wasn’t enough! Now participants of the Canadian Association of Insurance and Financial Advisors sponsored errors and omissions insurance plan face further potential rate hikes!

The reason is that far fewer brokers than expected have signed-up for the plan. The insurer for the plan, Employers Reinsurance Corporation (ERC), made it clear that it does not want to set off any alarms, though. It said it is committed to the plan for the long-term, and if there are to be any premium increases, they are a long ways off. Nevertheless, the concern is there.

When ERC agreed to be the new insurer for the Canadian Association of Insurance and Financial Advisors (CAIFA) sponsored errors and omissions (E&O) insurance, it anticipated 8,000 participants to the plan.

But according to information released by CAIFA at a media conference on Feb. 12, 2002, by that date only 5,000 had applied to the insurance plan. Of those, 2,500 were confirmed as accepted, with the final tally of insured still pending release.

Rich Kasyjanski, Marketing Leader, Specialty Insurance Segments, for ERC, told The Insurance Journal “We made an assumption that we were going to get the majority of the people that were in the program before and that is what our rating stats were based on.”

Tough underwriting

“We will also apply some strict underwriting, so it is not going to be a straight rollover,” stated Mr. Kasyjanski.

“We are not going to take the people who have had a lot of losses at the same premium. We are either going to not write them or raise their premium substantially.”

The attrition resulting from stricter underwriting by ERC will be about 10%, predicted Mr. Kasyjanski. This suggests that 4,500 of the 5,000 applicants might be accepted, substantially less than the insurer anticipated when it set its premium rates for CAIFA.

The exact number of plan participants is not being made public. Plan broker AON Reed Stenhouse has refused to comment. AON representative Norm Pope wrote to The Insurance Journal, “I am not prepared to comment on this program, or compare it to any others. This is confidential information pertaining to our clients.”

Asked what would happen if the final tally was indeed at or below 4,500 participants, Mr. Kasyjanski responded, “We are going to evaluate the experience. It may be less people but we may have the better insureds, so that would be good for us. Also, we are not in this for the short-term. It’s not like we’d say ‘Hey we wanted 8,000 and we only got 6,000, so we are going to get out.’ We are in long-term.”

Mr. Kasyjanski declared that ERC will need to have three to five years of valid experience before a good business decision can be made. “It’s not so much the number, but the experience that we generate,” he insisted.

The group’s performance and profitability will be reviewed periodically, affirmed Mr. Kasyjanski, but no action on the company’s part is anticipated before at least 18 months have passed.

“We are in this long term to make money, just like every business. If we write better accounts but fewer then our long-term profitability will be better. We are also going to have a more stable program for those in it to be longer.”

He said there is no way that the company will underwrite everyone who applies. The hope is that the plan will attract better risks, said Mr. Kasyjanski. “Our objective is to ensure that as many good insured stay on the book as we can. If we end up with all the bums then we will have to charge them a lot of money. Obviously the rates would be inadequate. But then that is why we are applying some underwriting rigour to it.”

“For right now we are pretty optimistic,” Mr. Kasyjanski continued. “The feedback that we are getting from CAIFA and the broker is that they are happy where they are and they are glad we are bringing good service to their members.”

CAIFA sues

CAIFA blames its former E&O broker, Barber, Stewart, McVittie, and Wallace (BSMW), in part for the loss of so many of its plan participants during the transition between insurers.

CAIFA CEO Steve Howard issued a statement on February 12 stating, “Since January 21, the broker formerly responsible for CAIFA’s E&O insurance plan, Barber Stewart McVittie & Wallace, has repeatedly made statements that are false and misleading. Moreover, those statements have been picked up by various media, including the news media and Internet discussion areas. The statements, and subsequent comments, have called CAIFA’s reputation into question and have even degenerated into questions about the integrity of CAIFA’s senior staff. This situation cannot be allowed to continue,” said Mr. Howard.

“Today, I am announcing that, after reviewing the substance of Mr. Glenn Wallace’s comments made at CAIFA’s town hall meeting and subsequently posted on the Internet, we have instructed counsel to initiate legal proceedings against BSMW,” he said.

At the meeting, Mr. Wallace stated that the losses within the plan were acceptable, and that The St. Paul Fire and Marine was prepared to continue the plan with a premium increase of 10%.

These statements “are simply not true,” noted Mr. Howard. “In fact, the losses within the plan were not acceptable, as the subsequent decision by The St. Paul to cancel the policy has demonstrated. BSMW, as the plan broker, knew, or should have known, that the claims history would have led to a very significant increase in premiums, as it has, along with other events.”

Furthermore, continued Mr. Howard, “BSMW never made that offer to CAIFA. Nor is there any evidence that the insurer was prepared to make such an offer, and subsequent events have shown how unlikely that scenario was.”

After CAIFA chose to go with another broker, “BSMW obstructed the timely transfer of this plan to a new carrier by failing to transfer claims information in a timely fashion,” stated Mr. Howard.

He stated that its complications were overly sensationalized and misrepresented. The real issues facing the industry, he said, are issues such as rising claims and losses.

“This industry is increasingly a target for litigation, and securing adequate E&O coverage will continue to be a challenge,” Mr. Howard said. “Securing a new E&O plan that puts us in a position to better manage claims and loss experiences was an underlying element in our decision to move to a new broker. We continue to believe that we have positioned ourselves to protect the interests of our insureds in a very volatile industry,” he added.

Another suit against an unidentified website is pending approval by the group’s legal counsel. There has been speculation that the website in question is the For Advisors Only chat-list, in which the former Chair of CAIFA, Jim Rogers, disclosed his access code to private board briefings.

Contacted February 21, Mr. Wallace was still awaiting notice of the CAIFA lawsuit some nine days after the organization’s announcement. Mr. Wallace said he is beginning to doubt that CAIFA will pursue his firm, and noted that he doesn’t see what the organization might successfully claim.

Mr. Wallace consulted with his lawyers who have assured him that his position appears secure. He was also told that pursuing a lawsuit of his own against CAIFA would not be worth it. He said that he now views the affair as a simple contract termination, and he is willing to let bygones be bygones.

However, CAIFA might also be sued. A confidential source told The Insurance Journal that two class-action lawsuits against the association are being considered. Among the charges are misrepresentation and discrimination. Those involved are waiting upon news of damages to plan participants.

In the meantime, both CAIFA officials and the new insurer admitted February 12 that a formal contract has yet to be signed – well after the old plan’s cancellation on Dec. 31, 2001. Both the association and the new insurer were quick to say, however, that the plan is not in danger of being cancelled even if problems arise in the final negotiations.

Mr. Kasyjanski explained, “We have an agreement in principle. We do not have a signed agreement but we have the major issues resolved. We’ve agreed to the major issues, and we are issuing certificates like crazy, and AON is starting to cash those cheques.”