The professional indemnity (PI) market has recently faced a challenging set of circumstances in the UK. It started with the Grenfell tragedy and resulting lawsuits, which mostly affected architects and construction firms, but now other professions are facing difficulties getting affordable PI insurance as well.
With a higher risk of claims, insurers are less inclined to offer cover. As a result of PI firms taking action to control risk in this environment, many types of professionals are finding it more difficult to get the cover they need, especially at a cheap rate.
How are PI firms managing risk?
In light of the current market, the professional indemnity market has seen firms impose risk control measures to limit their exposure. Besides charging higher premiums, some firms have pulled cover from the market altogether. Or pulled their product for certain professions.
Of those who've stayed in the market, some firms are managing risk by reducing the amount of PI insurance they're comfortable writing. There are two forms of reduced market capacity in a harder market: 1) some insurers withdraw from the market and 2) insurers staying in the market reduce the overall volume of insurance they want to write. This can translate into lower limits of indemnity for individual policyholders, for instance.
Another risk management tool is to impose limitations on a policy such as excluding certain risky activities from coverage (e.g., cladding) or a higher excess on claims. Or to write a policy on an 'aggregate' basis instead of an 'any one claim' basis. An aggregate basis means the limit of liability on the policy applies to all claims brought, whereas an 'any one claim' limit would apply to each individual claim. All else equal, an 'any one claim' limit of size £X is better coverage than an 'aggregate' limit of the same size.
For example, say there are two PI policies each with a limit of £1,000,000. One is written on an aggregate basis and the other on an any one claim basis. If one claim was brought against a company for £750,000 then both of the policies would cover this (£750K is less than the limits on both). But if TWO £750,000 claims were brought against a company one year then only the 'any on claim' policy would cover both claims in full. The aggregate policy would cover the first £750,000 claim in full but only £250,000 of the second claim, until the £1M aggregate limit was hit.
Here is a summary of some of the ways that professional indemnity insurance providers:
- Reduced market capacity
- Higher premiums
- Higher excesses
- Lower limits of indemnity
- Cover offered on an 'aggregate' basis instead of 'any one claim'
- Excluding certain activities from cover
Policyholders needing more coverage than their insurer is willing to provide have traditionally turned to the excess layer market. Excess layer insurance is essentially an additional layer of insurance that sits above their primary insurance. If the limit of liability on the primary insurance is used up, the excess layer insurance kicks in. However, the excess layer market is also currently tighter than it was a few years ago, putting further strain on professionals and businesses looking to buy PI insurance.
Those involved in riskier work (e.g., construction) will have been hit harder by these changes in the market. Even accountants engaged in riskier work are seeing rates rise. Riskier work for accountants includes corporate finance work, overseas work, tax mitigation, financial services, investment advice, pension advice, mergers, acquisitions and disposals, and insolvency.
Why is professional indemnity insurance expensive?
As mentioned above, many firms are raising PI insurance premiums to help manage the risk of writing policies in the current environment. Some professions in particular will have noticed their PI insurance premiums are noticeably higher than in previous years.
The ACCA reports that many professions have seen premium increases of 5% to 20% in the past year alone. But policyholders with a history of claims or engaged in higher-risk activities can pay premiums 3X higher for their PI cover, or more.
For example, some independent financial advisors and accountants have seen premiums rise 150% and 300%, respectively. Architecture and construction businesses, especially those involved with cladding, have also seen massive increases or found it difficult to get PII.
The good news is that higher premiums should attract PI underwriters back into the market. And when that happens, prices should become more competitive.