Soaring professional indemnity insurance pricing and low trust creates ‘perfect storm’

Biba 2021: The professional indemnity (PI) insurance market was already incredibly challenging, but soaring prices and trust in the sector being at an all-time low following the FCA business interruption (BI) test case has created a “perfect storm”, said an expert industry panel.

Speaking on the second day of Biba’s annual conference in May, Nic Brown, Markel UK’s sales and marketing director, said: “If you look at premiums today compared to 10 years ago, they are quite commensurate - looking at that from a consistency perspective over a period of time is quite telling.

”Price has eroded over that period, it has been driven down and it is now starting to go back up, which is what we have experienced in the last 12 to 18 months and it’s got to stop. The yo-yo boom and bust pricing is something that is not good for the customer.

“Cheap, short-term, sustainable capacity coming in and out of this market has given a classic economic conundrum – which is oversupply, same demand drives price down. When that supply pulls out because margins are not being made, the price goes [up].”

He referred to this as “classic commoditisation” that has come about at the wrong time.

Meanwhile Richard Webb, director of Manchester Underwriting Management (MUM), linked short-term capacity to the claims made basis of cover, which only covers claims that are notified during the term of the insured’s policy - he added that MUM writes PI insurance on a claims occurrence basis in Europe.

This insures claims that occur during the policy period, irrespective of when the claim itself is made.

Although he warned: “What you see now coming in more often is a sunset clause – it comes in on that occurrence policy and starts to limit how long that policy will be around for.”

In insurance, a sunset clause sets a deadline for filing claims once the policy has expired. They can be found in claims made liability policies that include a time limit on how long the insurer will accept claims for after the policy expires or is cancelled.

As the majority of PI insurance is written on a claims made basis, circumstance is key. Webb continued: “It’s not exactly the panacea that people had hoped for, but there are ways round it. In Australia, they have the ability to throw a claim back to the previous year.”

But this only happens with some professions, such as for solicitors and members of the Royal Institute of Chartered Surveyors in the UK.

Webb said this short-term nature of capacity could allow entrants to enter the market quickly - as well as exit just as speedily.

Panel chair Peter Blanc, group chief executive of Aston Lark, questioned whether moving towards longer-term policies might be a solution.

He turned to the audience to ask whether there should be a switch between the claims made and claims occurring basis for PI cover, or whether some other solution might be better suited.

Brokers’ job

Brown added that some of Markel’s SME clients have had a horrific 12 months during the pandemic due to the response from some insurers.

Explaining the issue further, Brown said that the market has continued to lose consumer trust over the course of the Covid-19 pandemic, alongside the insurance industry putting its prices up at a time when many customers are feeling financially strapped.

This is in addition to the challenges arising from Brexit.

Brown said that commodity markets tend not to last very long - he stressed that value must be brought back to the customer.

“Prices are massively inconsistent and we need to bring that consistency back,” he added.

When asked by Blanc whether this pricing situation was brokers’ fault as they chase down cheaper premiums for clients, Aon’s managing director for UK retail Jane Kielty said: “It’s the broker’s job to get the very best deal that is available to their client in the market.”

But she stressed that “it’s not just about price”. This is because it is also the broker’s job to try to prevent claims.

“That’s the real problem here with the stability of what we have got, the nature of the claims being made,” she said.

A poll during the session revealed that 46% of online attendees believed that availability of cover was the biggest challenge facing brokers around PI insurance.

Movers and shakers

There has been a number of new entrants in the PI insurance market as well as exits, noted the panel.

Speaking about this, Aviva’s chief distribution officer for UK general insurance Gareth Hemming said: “The inflow and outflow of capital is just a feature of the general insurance market - some sectors see it more than others. That’s the nature of competition. I don’t think we can sit here and bemoan that.”

From an Aviva perspective, Hemming said the insurer tries to give stability to clients in terms of cover and price, but it cannot operate in isolation to the market.

Agreeing with Kielty, he said: “As long as clients are being told the full nature of cover, the stability of the capital, the quality of the capital and what may happen in the next few years, which isn’t that hard to predict, and the customer makes an informed choice – that’s all you can ask for.”