Professional Indemnity (PI) insurance is once again back in the headlines, with growing concerns about a COVID-19 driven recession and uncertainty surrounding Brexit driving up PI premiums.
While, the uncertainty surrounding COVID-19 may be a factor, it does not, in itself, explain the initial rise in rates as premium rates have been firming for the last two years.
This rise in price is in fact driven by a lack of insurance capacity in the PI market with only five or six key markets still in play today, a result of a Lloyd’s of London review in May 2018. After an underwriting loss in 2017, Lloyd’s Franchise Board examined poorly performing syndicates and classes of business with non-U.S. PI being identified as one of the poorly performing areas.
Under this review, Syndicates’ business plans were analysed. As a consequence, many Syndicates had their capacity significantly reduced, some left the PI class and others ceased underwriting altogether.
So, at a time when capacity was being severely restricted, rising premiums placed pressure on many (re)insurers who saw their capacity being reduced significantly quicker at a faster rate, meaning that they could not insure as many risks as they had wanted to.
Therefore, the PI market is in the midst of a “hard market” with shrinking capacity and pressure on premium pricing.
Yet, rising premium pricing should in theory attract new entrants to the market in order to grab a share of this profitability. Thus, a “soft market” is born with competitive pricing leading to premiums falling.
However, this is where COVID-19 is wreaking havoc. The volatility in the PI market is leaving many entrants wary of entering. On the other hand, the volatility in the market may convince an insurer to leave the market and thus reduce capacity even further.
The pandemic, combined with other events such as cyber-attacks, could create a series of events that results in increased claims for the PI class according to Tracy-Lee Kus, Managing Director of Financial and Professional Services at Aon speaking to Insurance Business. “We are likely to see a declining exposure base across our clients next year as revenues decline – this will create a perfect storm of insurers wanting more premium, but clients having less income to pay”.
In this scenario, many corporate risk managers would have difficulty getting a hearing at C-Suite level, if they were forced to pay for higher premiums at time when they may have less income. An even bigger concern to risk managers is the restriction on PI cover with limits being severely curtailed in many sectors. Companies that outsource many of their services rely on their suppliers being able to obtain a sufficient level of PI insurance that in turn protects their own balance sheet. If this cover is no longer available does the company try and seek a less able supplier who can obtain insurance, or take on the increased risk themselves? None of this is ideal and it seems the insurance industry often fails to understand the connected knock-on effect of their actions.
However, this is where a combination of strong data-led insights, a holistic understanding of a corporate’s organisation and a good working relationship between corporate and (re)insurer can help to avoid this nightmare scenario.