04 April 2024
Professional Indemnity Market Update
Q1 2024
The Professional Indemnity Insurance (PII) market saw a considerable shift in favour of Insureds during 2023 after a challenging number of years. Whilst concerns over the macroeconomic environment remained, market dynamics forced insurers to walk a fine line between maintaining underwriting discipline and competing in an increasingly volatile marketplace driven by a desire for growth amongst insurers. Although macro-economic indicators, such as inflation and the potential for recession, may suggest that premiums should increase, many of the best-performing risks saw rate reductions throughout the year.
Key takeaways
- Shift in Favour of Insureds: The PII market favoured insureds in 2023, balancing underwriting discipline with competitive pressures.
- Premium Reductions: Despite concerns, many low-risk clients saw premium reductions, challenging incumbent insurers.
- Considerations for Insureds: Continuity with insurers is important for stable pricing, especially for larger firms.
- Risks of Changing Insurers: Insureds should be cautious about changing insurers solely for lower premiums, as coverage discrepancies may occur.
- Emerging Risks: Industries like construction face new risks, requiring clarity on coverage for new roles and activities.
- Market Outlook: Favorable market conditions are expected to continue in 2024 due to insurers' growth targets driving competition.
Implications & considerations for Insureds
The increase in competition has created a particularly problematic environment for incumbent insurers. Whilst they must try to maintain rate adequacy, competing insurers can rate a risk with a blank slate, rather than a comparison to prior years and without the same underwriting restrictions of recent times. As the recovery from the pandemic continues, we have seen revenues increase for many of our clients, which is the principal metric upon which premiums are rated. As such, where a holding insurer may look for a premium level in line with revenue growth, a new insurer has greater flexibility in terms of pricing, enabling them to attack business.
As brokers, we emphasise to clients the value of the continuity of an insurer, particularly where they have supported an Insured throughout a difficult period. Continuity can lead to more favourable claims outcomes and stability in pricing over a more extended period, even if insurers pay losses. Nevertheless, SMEs remain largely cost-focused, understandably after a period when many will have seen premiums multiply and company directors can redistribute cost savings to other areas of the business. Similarly, where firms have not had claims and do not expect to, the continuity argument carries less weight. Conversely, larger firms and/or those who may have had more claims activity throughout the years are more likely to have experienced the advantages of loyalty and have the financial means to accommodate this. Furthermore, this loyalty is more likely to be reciprocated by insurers where there are larger premiums at stake.
Whilst premium savings are of course attractive, Insureds should be conscious of insurers ’buying-in‘ business at rates that are not sustainable, particularly where that insurer does not have an established track record in the PII market. The prime example of this is the Solicitors’ PII market, which has had a history of unrated insurers entering the market for a very short period and causing huge disruption, only for these carriers to go out of business shortly thereafter.
Insureds should be wary of any change in coverage when moving insurers in pursuit of a lower premium. For example, for construction-related professions, there can be considerable discrepancies in cover surrounding Fire Safety and Cladding, as well as restrictions relating to other types of work such as basements.
Renewal submission & emerging risks
Despite a general relaxing of underwriting attitudes, insurers remain far more scrupulous of the risks they write, so the quality of renewal submission remains critical. We have worked hard with our clients over recent years to compile a thorough presentation which can be updated with the relevant data each year. As well as the usual rateable metrics-revenues, work types and claims, insurers will often request additional information on emerging risks such as any exposure to sanctioned territories and the use of Artificial Intelligence (AI). As such, we encourage our clients to pre-empt these questions and address these matters in the renewal submission.
For the construction-related professions, the Building Safety Act (BSA) has introduced increased liability periods under the Defective Premises Act as well as the new Principal Designer (PD) role. Our Architects clients are increasingly asking whether they are covered to perform this role. Whilst this may vary depending on the policy wording, we advise all clients to clarify this with their insurer via their broker. PII policies will typically indemnify the Insured for their legal liability arising out of the performance of their Professional Business. Whilst the definition of Professional Business in many wordings will be broad enough to encapsulate these services, some will be far more prescriptive in terms of the services that are covered. However as a new role, it will still be a material change to information presented to insurers at renewal, so Insureds should disclose to insurers to avoid any potential coverage issues. In general terms, most insurers will note these new activities subject to the policy terms and conditions; however, clients should consider how any fire safety or cladding restrictions on their policy may impact on these services. As yet, we have not seen any insurers request evidence of competency related to these services or impose any specific restrictions, this may evolve as and when claims are brought under the BSA. The landscape for fire safety has improved, with most insurers now willing to provide some restricted cover, often with a retroactive limitation.
Market outlook
We expect these favourable market conditions to continue in 2024, fuelled primarily by insurers’ ambitious growth targets that drive increased competition.
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.