Professional indemnity – market update

Much is being made in the insurance and financial press at present around the availability and cost of Professional Indemnity insurance (PI).  For many industries and professions the cost of Professional Indemnity is spiralling and there are many examples of firms struggling to obtain cover at all.

Whilst all insurance markets are cyclical there has been a sustained period of soft market rates and an abundance of capacity since the early noughties with no significant hardening of rates since 2001-2.  However, since 2018 Professional Indemnity rates have been steadily increasing to the extent that it is not unusual for firms to struggle to secure quotes, for premiums to increase dramatically, or for the basis of cover to be altered and indemnity for certain activities removed (both going forward and retroactively).

WHAT HAS CAUSED THIS DRAMATIC SHIFT?

Lloyd’s of London, one of the global centres for Professional Indemnity, was forced to undertake a profitability review after underwriting results highlighted that PI was the poorest performing area of underwriting.  Areas of specific concern were identified as Financial Services advice, Architects and Engineering and general construction related risks.

In 2017, the Lloyd’s market paid out over £272 million in non-US architects and engineers PI claims alone, while taking in just £170 million of policy premiums.  The same review included a report from Lloyd’s that revealed that 62% of syndicates have recorded an aggregate loss on their non-US PI portfolios over the period 2013-19, making this their second-worst performing class of business.

Professional Indemnity is written on a claims-made basis, meaning that it is the policy in force at the time the claim is made that deals with it, rather than the policy in force at the time the work/advice was done/offered.  Therefore, liabilities arising out of past -work are as much of a concern for insurers as current and future projects.
Areas of historic concern to underwriters will include:

• Construction design projects where there is a propensity for claims today
• Conveyancing (Legal)
• Taxation & Tax Mitigation (Accountancy)
• Investment / Alleged Mis-selling / Pension Transfers (Financial Services)
• Valuation (Property)

SUPPLY AND DEMAND

Large claims associated with energy from waste projects, renewables installations and the potential exposure to cladding following the tragic 2017 Grenfell Tower fire have caused significant concern amongst Underwriters.  Coupled with this, we are seeing an increase in claims activity specifically in financial services and the construction sector, in terms of both frequency and severity.  As a result, rates have been increasing as Underwriters look to cover anticipated action and claims.

In addition, many insurers are no longer writing Professional Indemnity risks for certain industries, whilst others are exiting the PI market altogether. As a result, there is a surplus of demand and scarcity of a supply, so it is proving extremely challenging for some firms to agree indemnity at all, which results in rates increasing substantially.

This challenging market has been compounded by the Coronavirus crisis which will inevitably result in an increase in insolvencies and a challenging economy for a sustained period.  These economic challenges often result in an increased propensity for actions, again this is likely to increase claims frequency and therefore premiums will also increase as a result. Therefore, the challenges in this market are expected to continue for the foreseeable future.