BlogPost : Professional Indemnity

Professional Indemnity Crisis

8th Feb 2021: Professional Indemnity Issues - Is this the eye of the storm?

Clients buying Professional indemnity insurance in the last year are bound to wonder what is going on with their cover and increased premium, as their broker might try to explain why “rates are up” or “the market is “hard””. But why is it like this, what does it mean for you and what does the future hold?

Why the Hard Market?

Like all insurance, Professional Indemnity rates are ruled by the availability of capital to insurers, the levels of exposure / claims environment, the competitive forces at play and the likelihood of making an underwriting return on the capital.

The last year has been described as one of the toughest and most challenging to beset the PI market in decades. Business is being declined that would have formerly been accepted and for brokers placing complex cases is very tough. I have heard it described as a “perfect storm” and these are some of the reasons why PI has been getting more expensive, with higher excesses and narrower wordings:

  1. Underwriting Losses: Across the globe, Insurers are reducing their participation in PI or exiting altogether. They have reduced exposure by adding exclusions or higher excesses and have sought significant rate increases. Lloyd’s of London identified non-US Professional Indemnity as the 2nd worst performing class of business at Lloyd’s (out of 94 classes!) with consistent losses over the last 7 years. These losses mainly relate to the US, UK and Australia. There is a lot of PI written outside of Lloyds but these losses are a good indicator of the general trend the market has experienced.
  2. Exiting Capacity Following its 2018 Thematic Review, Lloyd’s instructed its syndicates to take immediate remedial action on their loss-making lines, such as PI and to focus on profit rather than growth. I have heard that circa 14 PI underwriters ceased to write PI business in UK in 2020 leading to a last man standing scenario where insurers can seek to mitigate their losses by naming their price.
  3. Losses from Construction: Some of the issues that caused contraction in 2019-2000 included 2017s Grenfell Fire tragedy and the student accommodation fire in the UK in 2019, leading to a combustible materials exclusion for the construction sector. Anyone involved in the chain such as Architects, Builders, Roofers or Cladding specialists will be affected and these trades have seen exclusions added to the policies in relation to Cladding, fire Safety, Asbestos & Basements. The Architects Journal in the UK surveyed its subscribers, who reported an average 213% increase in premia in the last year. Additionally these trades are dealing with confusing & poorly monitored construction regulation with which they are trying to comply. It highly concerning and retrograde, if certain aspects of their work is excluded under their PI policy, it leaves firms unprotected by insurance cover in the event of a claim.
  4. Impact of Covid  Just as the market looked forward in 2020 to the hope of a softening of rates, Covid hit and Underwriters were forced to work from home. Brokers found it difficult to contact underwriters and use traditional broking skills in negotiations. Brokers have been vying for a slice of capacity in the ever decreasing pie. Another concern in the market has been in relation to PI for insurance brokers themselves, and the potential impact of Business interruption as a source of significant claims in 2021. The impact of the FCA ruling is welcome news for policy holders, brokers and their PI insurers alike. The FBD ruling in Ireland is likely to also impact the sector, as it relates to broker PI.

Who has been worst hit:

Worst hit industries are Construction, Architects, Financial Advisors & Solicitors

What does the future hold?

Whilst there is capacity out there in 2021, and there will always be open competition for quality new business, some professions may have to wait a while for the landscape to improve. The jarring effects of the reduced capacity, losses and Covid requires a period of rehabilitation and recovery. It takes time to set out plans for a re-entry or make a case for a capacity growth (particularly in an unprofitable line!) and time for issues to be ironed out, both in performance and in profit. The fervent hope is that things stabilise after a market correction and industries can make strong cases for their members. Additionally our domestic insurers in "Ireland Inc" must continue to service our local market. Brokers and wholesalers will also be seeking capacity and endeavouring to make strong cases for the performance of our PI portfolios.

What can clients do?

Now is a good time to review who is acting on your behalf and ensure your broker is well placed to advocate for you. Clients must engage with their broker early to begin the process and mitigate any unforeseen challenges in the run up to renewal. With the help of your broker, demonstrate your company has greater understanding of market developments than the competition, and practices good risk management. It is key that a great case is made and your broker fully understands the steps your firm takes professionally to manage risk.

To get advice from a PI specialist get in touch with Brady Insurance team or send us an enquiry here.

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