Expert View: Layer upon layer of professional indemnity

This time last year the professional indemnity (PI) market began to change. Lloyd’s results showed non-US PI to be a poor class of business for many. The market hardened but, interestingly, not for all professions.

Construction has been hit hardest, with premiums rising, indemnity limits reduced, basis of cover restricted or some firms unable to obtain any cover at all.

But the market has yet to harden materially for other professions, a bizarre situation given that many insurers have seen nothing but losses from accountants, insurance brokers, solicitors and more. The reality is that PI has been under-priced for years, and the premium increases this year are only a step in the right direction.

Insurers dedicate income capacity to all lines of business and this is particularly so with Lloyd’s syndicates. As the year progresses, capacity is used up and some insurers cease writing new business or even any business at all. One feature of the long, soft market was insurers offering bigger and bigger lines.

A £5m or £10m limit with one carrier has been the norm for many years. But that’s changing, with many only offering a £1m or £2m line, leaving brokers looking to fill the gap. So, terms will be harder to come by and multiple layers are becoming common place once more.

Getting the balance right

There is a skill in underwriting to ensure a line matches the exposure that you are comfortable with for the right premium. In a hard market, where reinsurance isn’t as easy as it was, there is more focus on getting the balance right to the extent that there can be an overreaction. This creates a new problem for brokers.

The change in the PI market has led to those brokers who have only ever known the soft market to learn quickly how to find other markets to provide excess layers or co-insurance. Underwriters who have been in the market through the cycle (well over 15 years now) will see the gap in the market. Now is the time when an experienced underwriter can use their capacity properly.

Hard market requires thought

There are still risks where you want to offer a £5m or £10m limit. There are risks where you would want to provide excess layers or co-insure. A hard market requires more thought and, importantly, good communication between the underwriter and broker.

For the broker there is a need to make sure excess layer markets have strong financial rating. You want to make sure any “worst case scenario” claim that exceeds a primary layer will be covered.

Heading into the final quarter of 2019, the PI market place will continue to challenge brokers and underwriters. Access to markets will become key for brokers, but even more so access to the markets that have the capacity and ability to write the right limits.