Conditions in the professional indemnity market are some of the most challenging ever seen. Nigel Dorning looks at the problems and possible solutions.
Managing the insurance cycle in the UK professional indemnity market has become increasingly challenging recently. While professional firms are under financial pressure and underwriters are facing a fast-rising claims burden, conditions in the underlying market are some of the most taxing the sector has yet had to face.
The origins of the current environment can be traced back to the early 2000s when, in response to a sharp uptick in PI profits between 2002 and 2005, extra capacity piled into the class. This additional capacity came from a range of sources, with Lloyd's adding new resources, but perhaps most impactful was the arrival of some of the larger corporate insurers into the market, which saw rates driven downwards, and terms and conditions extended.
As a result, premiums significantly declined in 2006 and 2007 and continued to decline — albeit at a lower pace — through 2008 and into the end of last year. This year looks likely to be a flat year as far as rates are concerned. This leaves insurers in the difficult position of facing a reduced premium base while dealing with the worsening claims experience that the recession is delivering.
The impact of the economic difficulties, while variable depending on the individual professions, is seeing a general squeeze on fee income combined with a reluctance to hire or outsource, leaving many professional firms running tighter operations with fewer people. This squeeze increases the opportunity for errors to occur or, worse still, for illegal activity to take place.
Evidence for these trends can be seen in Ministry of Justice court statistics for 2008, which showed that fraud by solicitors had jumped 158% and 2009's figures may be even more damaging.
Nowhere is this impact being felt more strongly than in those PI classes that are exposed to the property sector. Architects, surveyors, building engineers and conveyancing solicitors are all professions delivering significantly impaired loss ratios to insurers. Historical performance suggests that rising insurance loss ratios for surveyors' PI closely mirrors the level of house repossessions. The surveyors' professional body, the Royal Institute of Chartered Surveyors, estimates that over the next two years more than £200m of property related fraud claims could find their way into the PI market.
So, what are the implications of a rising claims burden in a rating environment that remains benign? Well, they are two fold. First, the trend for rising rates when it arrives is likely to be prolonged. Second, and perhaps more damaging, is the potential withdrawal of cover.
Compulsory insurance cover is a fact of life for most traditional professions, and is a requirement that is being expanded to emerging professions such as claims managers. For smaller firms that have either suffered a loss on their PI insurance or have a practice specialism that leaves them particularly exposed to high risk business areas, it will become increasingly difficult to get cover.
In the legal profession, this has resulted in increased numbers of solicitors throwing themselves on the mercy of the Assigned Risk Pool with its punitive 27.5% premium rate for the first £500 000 of cover. Participants in ARP doubled in 2009 to around 4% of all law firms in England and Wales. RICS estimates that, since 2008, the number of insurers willing to offer PI insurance to surveyors whose business includes more than 20% of surveying or valuation activities has reduced by 50%.
For those fortunate enough to still be able to access commercial insurance cover, they can now expect higher premiums. Broker evidence collated by Datamonitor showed that solicitors experienced rate rises of 12% to 15% during 2009.
While this may seem like a gloomy picture for both professionals and insurers, there are steps that can be taken to mitigate the impact. Most important among mitigation factors is working together to improve risk management among professional practices of whatever size and sector. Underwriters are able to influence the process in two ways. First, underwriters and brokers can together offer practical advice and support to insureds to help improve their operational practices. Second, underwriters may encourage increased focus on risk management by rewarding well managed professional businesses with sustainable premium levels — a commodity that will become of increasing value as PI rates rise.
While the positive impact of these efforts on the insureds is clear, insurers can also benefit from refocusing on their clients' businesses and individual risk profiles. By finding ways to enhance and extend the service they provide, insurers can increase the value they bring to clients, thereby providing some added justification of the rate rises that are expected in this class. By helping a professional firm to assess and identify the individual risks it faces and by providing recommendations on the low-cost measures that can help limit these claims drivers, underwriters can further demonstrate the quality of their offering, while improving the risk profile of their insured — an outcome that is surely a win-win for all.
Working together for better management of professional risks is clearly the way forward and this poses a demand on both parties. Just as underwriters need to ensure they are targeting the right risks, which relies on spending time getting to know the insured and their business, so must professionals focus on improving their risk profile and proving that they are a quality risk in the eyes of the underwriter.
Nigel Dorning is head of professional indemnity at Amlin UK
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