Blog: Covid-19 and insurance brokers’ PI

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As a spike in claims against broker professional indemnity policies is expected as a result of the coronavirus outbreak, Manchester Underwriting Group CEO Charles Manchester looks at the ramifications for insurance brokers in the UK.

Insurance brokers face claims alleging professional negligence all the time, primarily when a customer fails to get the outcome that they want from their insurer. Insurance is a strange business – it’s got to be the only thing that people buy without looking closely at it until the day they need it most, often paying a lot of money, so it’s understandable that expectations are often formed with hindsight and consequently insurers can fail to meet them.

Insurers are arguing, rightly, that the insurance market simply can’t be expected to pay for all the losses arising out of what is, after all, an unprecedented event in modern times. Premiums would have to increase by multiples if that were the case. Like war insurance, there is a limited market but it’s not cheap and isn’t a solution for entire economies – some risks belong with the government. If insurers can’t cover this loss then brokers and their insurers are even less able to. Most of the time.

There are two key hurdles that a claimant will need to overcome: First, should the demands and needs analysis have covered the possibility of an as yet undiscovered pandemic? Possibly, if you’re advising an international passenger airline or the All England Tennis Club. But not every SME, surely? While it will be case specific, it’s a big ask to expect a court to find a broker negligent when 95% of brokers did the same thing.

Of course, the Financial Ombudsman Service decides on what is fair and reasonable and brokers might see some rough justice but it’s still a very big ask. Second, if a claimant proves negligence, they then need to demonstrate causation. There are difficulties here, too: Was the product easily available? Would the customer have bought it (and looking at whether they always bought other insurances recommended such as cyber and income protection – which have higher claims frequency and low take up – would be a guide), given that the cost would have been substantial (unless they were lucky enough to catch insurers out with a poorly drafted wording)?

Most claims against brokers fail, principally because the broker has done nothing wrong. It will very much depend on individual circumstances. And there’s the rub – claims will need to be fought, they may be appealed and litigating through the different levels of the court system is eye-wateringly expensive, even if you win. And some won’t win.

If we look at the UK broker market there might be, say, 3,500 broking firms. If they pay an average PI premium of, say, £7,500 (or less than this), and the top 100 brokers pay an average of £50,000, the market is worth less than £25M net of acquisition costs. That’s not a big pot when you consider that there are still non-Covid claims out there and we’re in the midst of the greatest economic crisis for a century. Just this week it seems one broker’s PI claim (not insured by our business) might cost well over £5M. The years of soft market means that rates have been inadequate and the upward pressure was gaining momentum even before the current crisis..

So, the PI market is very cautious right now, to say the least. Few insurers will want to increase their exposure to Covid-19-related claims by writing new business but there are one or two. The sensible ones will be looking at their aggregate exposures and balancing these with their risk appetite.

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