The professional indemnity insurance (PII) market may be hardening for the first time in years. But there remains plenty of choice for well-managed firms who act swiftly.
Lloyd's of London have shed fresh light on PII market conditions outside of the US. In short, this form of insurance has been unprofitable for many insurers for several years yet has continued to grow.
In this article we'll be describing this hardening market in more detail. We'll also finish up with advice on how firms can proactively act to adjust to these changes in the market.
Lloyd's performance: A valuable comparison
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.
Interestingly, 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.
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 premiums.
The International Risk Management Institute describes insurance appetite as “The degree to which an organisation's management is willing to accept the uncertainty of loss for a given risk when it has the option to pay a fixed sum to transfer that risk to an insurer.“
This is a key factor in the behaviour of the market at present; several Lloyd's syndicates have already exited the market, including Aspen, Canopius, Brit, legacy Novae and Channel with many more before them significantly reducing appetite.
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.
Recent events and their impact
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.
Following such an event, insurers commonly look to tighten their belts for any and all liabilities potentially associated with the rectification of any building projects affected. Lloyd's incurred £272m in paid claims in 2017 compared to a premium income of just £170m across non-US architects and engineers PII.
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.
State of the market
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.
Steps ahead
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 in their presentation - to provide a greater insight into their practices - are generally reaping the rewards of that effort.
There should be plenty of choice, but it is important not to be complacent because the insurance cycle can turn quickly. The Lockton team recommends you select your broker carefully; direct access could prove to be important if you would like a swift resolution.
Time is of the essence. Firms should not leave it late – the most common renewal date of 1 October looms.
Firms that haven't already begun preparing their presentation should do so without any further delay. If the market does turn, any last-minute buyers might find themselves in a very different place this year from what they have been used to.