Hard Luck

Industry experts Griffiths and Armour explain why a hardening Professional Indemnity market could affect your business.

The last 12 months have seen a significant deterioration of the UK professional indemnity (PI) insurance market with a large number of insurers withdrawing and others seeking to reduce the amount of business they write. The knock-on effect of this is premiums increasing, significantly for some professions, and policy coverage being reduced. So what has been the cause of such a rapid and significant change?

One factor commonly held as a major reason is the Grenfell tragedy of 2017 as both this and the costs in making mid and high-rise buildings around the UK less vulnerable to fire will cost the insurance industry significant sums. But the reality is that this is only a rather small part of the equation.

As with all insurance types the PI market works in cycles and the last 15 years has seen an extended period of a ‘soft’ conditions where capacity is in oversupply and this puts downward pressure on premiums, widens of policy coverage and lowers underwriting discipline. For an insurance class that rarely makes a profitable return, particularly for regulated and construction professions, this creates a completely unsustainable pricing model which at times requires a major market-wide correction.

Lloyds of London undertook a review of the insurance market in 2018 and this showed PI insurance to be the second worst performing area. Added to Grenfell, a number of extremely large global PI losses and natural catastrophes detrimentally affecting underlying reinsurance markets, most insurers were left with an ultimatum to either develop a business plan that would return their PI business to profitability or they would no longer be allowed to provide PI. This led to a number of insurers withdrawing immediately and those left having to continue with a very different strategy of sustainable pricing and disciplined underwriting.

So what does this now mean for professional firms who often need PI to trade? There have already been and will be more firms who are forced to close or lose contracts because they cannot secure the right PI cover or any at all. Firms should therefore look to start their renewal process earlier than ever and be prepared to provide greater detail about their business and how they manage and mitigate risk. The more proactively they can do this, the more favourably they will be perceived by PI insurers. It is also more vital than ever to use an experienced and professional insurance broker and choose your PI insurer based on their track-record and reputation rather than simply the cheapest. Firms with a long-term relationship with a quality PI insurer usually fare much better when market-corrections happen.