The UK professional indemnity market has changed over the last 24 months. It began to harden during 2018 but frustratingly not for all professions. The market starting to harden was no great surprise, especially for those in the industry who have been through the insurance cycle before. But there are plenty of underwriters and brokers in the UK professional indemnity market that have been working for over 15 years and only known a soft market. This change of environment has thrown up new situations for many, which are complicated further by the market hardening being patchy. This has created dangers for insurance brokers.
Hard markets are challenging for all involved. Clients face substantially higher premiums than they budgeted for and the cover available may be restricted and not meet the demands set out in the contracts they have entered into with their clients or required by their professional body or regulator.
|Underwriters withdraw from the market entirely or pull back by restricting their appetite, limiting their exposure by writing smaller line sizes, restricting cover, increasing premiums and deductibles.
This leaves the broker in the middle, faced with unhappy clients and a market place that is contracting and no longer providing the cover their clients need. In the worst case, brokers have been unable to obtain cover and their clients have ended up going out of business.
Added to this is the issue of those brokers and underwriters who have only worked in a soft market environment. In the UK, the soft market has been around for a long time and many brokers and underwriters have spent the formative years of their career selling on price with policies that offer wide cover. This is not the best training ground for when the market begins to turn. Clients who buy professional indemnity have become used to brokers promising a saving on their renewal premium and so they allow for that in their own budgets. Underwriters have become used to top line growth and so reducing premiums, forgetting about the rate they need to achieve to be profitable.
It has led the UK PI market to where it is now. Construction professionals, in particular design and construction risks, have been hit the hardest with sharp rate increases and cover being limited. ‘Any one claim’ limits have been replaced by aggregated limits and the total limits of indemnity available are lower.
The PI market has become something of a minefield for insurance brokers as a result of these changes. The lower hazard risks, such as those into IT, media and business consultancy can be placed fairly easily. Accountants and Insurance Brokers have seen an increase in rates but nowhere close to those experienced by the construction professionals. So, for now, many are yet to experience that issues faced by the construction industry.
Brokers need to adapt to cope with the changing market. There are certain steps that they can take to reduce friction with their client and the PI market. These steps are nothing new but skills that may have been lost during the soft market.
Managing clients’ expectations is the first step and that involves managing time and communication. Steps such as identifying the risks that will be problematic to place. If high limits of indemnity are required or if the expiring market is withdrawing then access to capacity is key. That may require access to the wholesale market in London. So the renewal process needs to start earlier and the retail broker needs to form a good working relationship with their wholesale broker. Leaving it late simply means the current policy will expire and then it becomes a much harder position for the broker and positively dangerous for the client.
Being open and realistic with a client about the cover available in the market is the best protection for a broker. Clients who receive bad news late in the day will never react well. The client may not be keen to hear that their premium is going up or limits are coming down but it is better to be open with a client about the reality rather than pretend that the market hasn’t changed. I have had several conversations recently with brokers who found the first renewal in the hard market tough but led their client to believe the next renewal would be easier, when, in fact, the terms got harder and so did the message.
Many clients have entered into contracts with terms relating to the insurance cover they hold. It may not be possible to purchase such cover in the current UK PI market. Insurance brokers and their clients’ solicitors should have advised the client to have a caveat in the contract dealing with the possibility of future unavailability of cover.
Finally, frustrations arise and clients, insurers and insurance brokers can all get excited and things can get lost in communication. Recording conversations on file and confirming any verbal agreements or statements in writing can provide key evidence should any challenges arrive. The lack of the piece of evidence can be the difference between a claim against an insurance broker and a problem simply being resolved.
|A hard market is not just a hard place to trade but it can create a dangerous environment for a broker.