Professional indemnity insurance: how to navigate the changing market
Internal performance reports from Lloyd’s of London have shed the most light yet on PII market conditions outside of the US. In essence, this form of insurance has been unprofitable for many insurers for several years, yet has continued to grow.
Few losses in recent years can actually be attributed to the financial crisis.
Some 62% of Lloyd’s syndicates that write non-US PII have made an aggregate loss over the last six years, according to documents from the Lloyd’s Performance Management Directive.
Non-US PII was revealed to be second least profitable class at Lloyd’s. While Lloyd’s by no means constitutes the entire PII market, its results are a reasonable barometer of the market as a whole. Few losses in non-US PII in very recent years can actually be attributed to the financial crisis. Overall, an abundance of capacity has influenced underwriting discipline in non-US PI, Lloyd’s added.
State of the market
For 2018, the size of the non-US PII market within Lloyds is £1bn in gross written premiums. This is written by a total of 68 syndicates, 39 of which account for 93% of the premium. Several Lloyd’s syndicates have already exited the market – including Aspen, Canopius, Brit, legacy Novae and Channel – significantly reducing appetite.
Regarding construction and property non-US PII, the tragic events at Grenfell Tower will have inevitably had an effect upon a reduction in overall capacity, as insurers look to tighten their belts for any and all liabilities potentially associated with the rectification of building projects affected. Lloyd’s also incurred £272m in paid claims in 2017, compared with a premium income of just £170m across non-US architects' and engineers' PII.
Separately, August saw the withdrawal of Libra Managers, which provides PII to 20 of the top-200 law firms. The insurer confirmed it would not underwrite any new business from 1 October. That left 10 of the 20 firms, for which 1 October is the renewal date, with just six weeks to find a new insurer.
It’s important to note that not all industry classes of PII have been unprofitable.
Lloyd’s has recommended that syndicates should have an action plan for loss-making non-US PII portfolios to return them to a sustainable profit. If these action plans fail to satisfy Lloyd’s, it will not agree to the class being written in 2019, either as a standalone class or as a subset of a broader class of business. All material syndicates must provide a paper detailing how they will address the thematic findings of the non-US PII review by 30 September.
By geography, UK PII is the most heavily written, accounting for 33% of the non-US market. Canada accounts for 19%, Australia 17% and other non-US territories make up the remainder. UK PII has traditionally been the least profitable.
By industry, design and construction is the most heavily written, accounting for 24% of the non-US market. Lawyers PII accounts for 21%, accountants' 11%, technology 4%, and miscellaneous 40%.
It’s important to note that not all industry classes of PII have been unprofitable. Accountants' PII and tech PII were approximately cost-neutral between 2011 and 2016, while miscellaneous PII made only a small loss. The largest losses were concentrated in lawyers' PII and, to a lesser extent, construction PII.
Firms that spend more time with their presentations are generally reaping the reward.
For the first time in many years the PII market is hardening. Some firms may find it difficult to obtain competitive terms. This hardening market is aggravated by reduced excess layer capacity, which means that those firms that buy additional coverage are paying more, particularly for their first excess layer up to £10m.
It is far from all “doom and gloom”, however. Firms that spend a little more time with their presentations, to provide a greater insight into their practices, are generally reaping the reward.
There should be plenty of choice, but it is important not to be complacent because the insurance cycle can turn quickly. Select your broker carefully; direct access could prove to be important if you would like a swift resolution.
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