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).
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:
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.
While UK PI market conditions are extremely challenging, it is possible for firms to take steps to help manage insurance costs and cover. It is important to engage a broker who has specialist capabilities. When engaging with PI underwriters it is not just who you approach and engage but how you approach them and how the risk is presented. It is advantageous to work with a broker who has the ability to access the Lloyd’s and London markets in addition to the UK and Global composite insurers.
We would counsel against engaging multiple brokers to compete as where there is a finite market of underwriters, they may see the same or variations of the same presentation several times which may affect their appetite to offer terms.
We strongly recommend starting the renewal process early. Insurers are adopting a robust approach to assessing risks and they are being selective. This is compounded by the challenges of negotiating remotely during periods of lockdown and accessing Lloyd’s underwriters, which means that the renewal process is taking more time. We would encourage firms to leave plenty of time to put together the extra information that insurers may require and answer any additional questions that underwriters may pose.
Presentation of risks need to be as detailed as possible including Proposal forms, additional questionnaires, example contracts, nonstandard documents, business plans, financial information and CVs plus plans and designs where necessary. Providing insurers with as much information as early as possible will ensure that the broker has the time and opportunity to negotiate the best terms possible.
It is essential that firms carefully consider the status of any on-going claims, ensuring that all outstanding matters are dealt with and verified claims experiences obtained from the existing and previous insurers in good time. Underwriters will also look to understand what lessons have been learned as a consequence of any losses that have led to claims and how improvements are being made.
Underwriters will be placing more focus on a firm’s internal procedures and risk management controls when considering a risk. Therefore it is often necessary to be able to demonstrate the levels of risk management and control by providing documentation and supplementary information highlighting the extent of risk management and procedures; robust cashflow management measures; client and supplier contracts and supply chain management methods. The underwriters are looking for evidence that the business is well managed and that this level of management supports the assertion that the firm is a good risk.
SRG have specialist capabilities in Professional Indemnity. We are Lloyd’s brokers and have access to a number of exclusive facilities. As a major UK broker, we can exert our leverage to deliver value for our broker partners and clients.