04 November 2024
Professional Indemnity Insurance Market Update H2 2024
The professional indemnity market has continued to soften throughout 2024 and at a greater pace than most would have expected.
Increased capacity and a desire for growth amongst insurers have fuelled competition. In many cases, this has resulted in significant rate reductions and loosening of coverage restrictions, particularly in relation to fire safety and cladding for construction-related professions.
PI insurers and the wider Lloyd’s markets reported increased profits in 2023, largely as a result of the remediation work undertaken in the preceding 5-6 years. This has allowed some of the red tape imposed after the “Decile ten” review to be removed and enabled insurers to shift from a strategy of remediation to growth.
A significant recent development in the construction sector is the phase two report of the Grenfell Tower inquiry along with the associated legislative changes. As anticipated, this report found a combination of failings from unsatisfactory guidance on compliance with the Building Regulations, negligence on the part of the companies involved and inadequate thought regarding the choice of materials and fire safety generally. Nevertheless, we do not envisage that this report will currently change the trajectory of the professional indemnity market. The shortcomings contained in the report were largely already widely known. The introduction of the Building Safety Act 2022 has addressed some of the regulatory failings that were present at the time, and as a result, we are expectant that the market will continue to soften.
As such, whilst exclusions may still apply to historic work, architects, engineers, and contractors can expect at least aggregate sub-limits on a go-forward basis. Similarly, the RICS minimum terms now insist on cover for buildings of five storeys and above with effect from 1st of July 2024. This is symptomatic of a general relaxing in underwriting attitudes across the market as many insurers seek to recover premium lost through rate reductions by writing more new business and increasing line sizes (the amount of capacity deployed on individual risks) on existing business.
Elsewhere in the non-construction related PI market, significant competition within the small to mid-market firms has driven pricing down to the lowest levels since 2017. This was particularly evident in the recent 1st October Solicitors renewal season which is often a barometer for the wider PI market. Increased coverage, reduced deductibles and higher limits are also features on this part of the market cycle and we expect these trends to continue through 2025.
However, as a long-tail class of business, PI claims can take several years to crystallise. Whilst insurers will model predicted losses based on historic development patterns, it is very difficult to measure the performance of a particular underwriting year in the short term. As such, it appears that market dynamics rather than performance are driving this trend. Whilst we have not yet returned to the rates of 2017 and prior, the sustainability of the current direction of travel is questionable. Particularly against the backdrop of economic uncertainty, claims of inflation and emerging risks such as AI and new technologies employed in the built environment and energy sectors to combat climate change.
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