The FCA’s test case has contributed to broker PI being ‘in a very, very difficult position’ says network MD, as Covid exclusions also cause costs to escalate

By Editor Katie Scott

Brokers’ resilience throughout the Covid-19 pandemic has been applauded by many within the industry, however one challenge remains lurking, looking to tap into brokers’ profitable purses – professional indemnity (PI) insurance.

In part thanks to the FCA’s test case on Covid-linked business interruption claims, there has been a corresponding upswing in brokers’ PI renewal prices as some commercial clients looked for financial reprieve via negligence claims in lieu of insurer payouts.

Linked to this, Willis Towers Watson Networks’ managing director Sara Fardon noted that “the FCA has started to indicate that [brokers] must have Covid cover” within their PI insurance, which will undoubtedly prove to be “very expensive” for businesses.

She told me last month: “Broker PI is in a very, very difficult position.

“The market is very expensive and the FCA has started to indicate that [brokers] must have Covid cover - [they] can’t just say [they are] going to take the cheaper premium if there’s a chance of Covid exposure on the books.

“There is cover available, but it is very expensive and of course that puts a different challenge for businesses.

“And then the difficulty of the excess layer – can they get the right amount of cover is another challenge. None of it is easy.

“There is a bit of new capacity coming in to look at broker PI, but I think it’s a little bit early to understand fully how that’s going to operate.”

Fardon added that at the start of the pandemic, Covid-19 exclusions in policy wordings were “all unknown then. People didn’t really understand if they had got Covid exposure going on throughout their book”.

She continued: “We’ve seen our own network members telling us about how much the premiums have gone up for their errors and omissions (E&O) insurance - it’s really become a point of if you’ve got the cover and you’ve got renewal terms, then take them. Don’t go thinking that you’ll be able to move it around the market particularly.”

This view is shared by Jaime Swindle, managing director of networks and products at Ardonagh Advisory-owned Bravo Networks, which comprises of Broker Network and Compass.

She told me: “PI as a class was already under pressure from a rating point of view, but then actually brokers’ own PI on the back of what is nervousness around [directors and officers] and the [business interruption] test case is increasingly challenging.

“Excess levels [are] increasing [and] capacity in that market has pretty much contracted.

“We’ve got brokers who are in a situation where they’re having to negotiate their PI and they’re worried they’re not going to be able to get cover the next day, which means they won’t be able to trade.

“That is a bigger issue and one where it needs far more focus from an industry perspective.”

Brokers on the ball

Although the PI market as a whole may have been moving in this price direction prior to the pandemic, the impact of the FCA’s test case can’t be underestimated when it comes to brokers’ own coverage.

Fardon explained: “The test case was outstanding and so brokers were then feeling pretty nervous about the fact that maybe they’ve got to renew, but they can’t then get cover for Covid. So, not great really.

“The test case has moved to a conclusion, but brokers have been giving advice on that and as soon as something is on the news, brokers have been inundated with clients phoning, when of course sometimes it’s difficult to get your thoughts straight on what is a very complex issue. But brokers have been at that forefront of needing to do that. They’ve carried on doing that.

“From a test case perspective, we’ve worked with brokers to understand what would be the exposure within their book. Brokers have then had to give advice.”

On the flip side, Fardon added that the business interruption test case has also proven the value of advice, which plays to brokers’ strengths.

She said: “Brokers are there to give advice and never more so than this year, but also I think clients have probably become much more aware of the fact that not all policy wordings are the same.

“Brokers really need to be, they always are on the ball to be fair, but that advice-led sale is really, really important.”

The hard market has seen premium prices escalate across many product lines – is professional indemnity cover, therefore, simply brokers’ cross to bear in difficult economic conditions?

However, with a FCA survey published in January bemoaning brokers’ financial resilience during the course of the pandemic, alongside current conversations around the steep costs of the Financial Services Compensation Scheme (FSCS) levy, it is understandable that brokers may be concerned for their coffers.

Whether broker PI prices settle down as insurers make their way through the outstanding stacks of BI claims is something many businesses will be watching for.