Ann Hesketh finds that the craze for litigation along with increasing regulation has helped increase business opportunities in the PI market
British society is becoming increasingly litigious and those in the professional indemnity (PI) market are beginning to feel the pinch.
But, while escalating claims and over-inflated legal costs have been causes of major concern for insurers and brokers, such a scenario also means that more professionals are looking to ensure themselves against potential exposures.
"The real emerging trend in the PI market is increasing litigation for all professions," says Justin Bowen, underwriting manager at Hiscox. "Customers are more aware of their rights and we have seen an increase in claims frequency as well as costs."
Bowen adds that the market has been softening over the past 18 months and reached a level that is unprofitable for insurers. "It has only been driven by more capacity coming into the market," he explains.
Despite growing opportunities for new business in a market that has been consistently softening, tapping into those comes at a price. Andy Dore, active underwriter at AG Dore & Others, says the main challenge for brokers is to keep profitability despite the high costs of regulation and falling rates.
The PI market for the traditional professions such as lawyers, architects, surveyors and accountants, for whom insurance is compulsory, is well-established.
Dore points out that emerging markets, such as IT, media and financial services, are the way forward.
"We need to look outside the box," he says. "With more miscellaneous practices we can be a bit more flexible."
In the IT sector, for example, while large firms consider insurance a key element of their risk management strategy, smaller companies and sole-traders are still slow in catching on.
Their clients, however, are lending a helping hand. Many companies insist that their IT contractors possess PI insurance, regardless of their size.
And it is not unusual for large organisations to ask for cover of up to £5m.
Insurers and brokers see such a move as a direct result of the so-called compensation culture, which has made clients more aware of their rights to be compensated should something go wrong, as well as giving them someone to pass the liability on to should they be sued.
"Companies rely on technology more than ever before - that's why medium and large companies want to see evidence of PI cover. They know the policy will pay out; they can't afford to lose the money," says Sam Franks, PI underwriter at Hiscox.
PI claims against IT professionals are also on the up. According to a survey carried out by Hiscox last year, claims for this class of business had risen 40% over the previous four years.
Despite that, Franks believes this market is booming with new business opportunities for insurers. "IT will continue to be the fastest growing sector in our economy and 38% of IT consultants are uninsured," he explains.
"So this is not only a growing sector, but there are also lots of uninsured risks out there."
Although the insurance market is responding well to the needs of IT firms that provide more tailored products, the main challenge remains convincing sceptical IT consultants to buy cover. "They do not see themselves as giving advice, but as providing a system," says Franks.
But the fact that more people are being forced into buying PI insurance for contractual reasons is boosting awareness of the product in the market place. This trend is also being replicated in the media sector.
Bowen explains that media risk is becoming more complicated, with professionals getting involved in areas such as direct marketing.
"It is a changing environment and there is a need for the industry to cover some of the issues it faces, such as copyright infringement, libel and slander and privacy," he says.
"The explosion in the number of media channels such as the internet is further complicating matters for media professionals. Claims are an increasing concern and this leads media firms and their customers to increasingly demand PI cover."
More traditional PI areas are also experiencing changes. With asbestos claims crippling insurers, especially on the product and employers' liability side, chartered surveying firms looking for PI cover are faced with prohibitive premiums and limited cover, which usually excludes bodily injury.
Trying to protect themselves against long-tail liabilities, which create a massive problem in terms of reserves, insurers are becoming increasingly cautious. David Armes, managing director of Markel's professional liability division, says just a few insurers offer bodily injury cover.
He says one of the main problems is that if a surveyor claims a building marked for demolishment has no asbestos, which is later proven to be wrong, the insurer could be left to pick up the tab in the years to come should someone develop an asbestos-related illness.
"The consultant could be found negligent and the problem for PI insurers at that point is that reserving is almost impossible," explains Armes.
"There is no course of action - claims made doesn't necessarily solve the problem of long-tail liability."
Such a scenario does not give insurers much comfort. But a new accreditation scheme is being designed to give surveyors specialist training and increase their chances of getting a more comprehensive cover.
According to Dore, the National Individual Asbestos Certification Scheme (Niacs), a six-month training course for asbestos surveyors, will produce experienced and qualified specialists. AG Dore & Others has subscribed to the system.
Dore says: "It will allow for greater limits than the current £5m and bodily injury cover. The good thing about Niacs is that it suggests reported language for surveyors to use, which is very watertight."
Another area that has given insurers food for thought is accountancy.
But despite major US scandals involving top firms, Mark Roddis, director of the professions division at Alexander Forbes, says "accountants remain one of the easiest professions to place in the market at the moment".
One of the reasons is that the 'big four' - PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young - whose duties include auditing plcs, have their own captive arrangements and are treated entirely differently from other firms.
Vic Knope, a partner at broker FirstCity, explains that the second tier of accountancy firms, about 20 'class A' firms, are insured in the traditional market and get competitive deals. The third tier includes all other large, medium and small firms, which do not carry out plc audits and are therefore not exposed to those risks.
However, Knope adds that, although the UK market has not been influenced by worldwide scandals, there are other problems to look out for. "Cross-referral work, when a firm in London is associated to another firm in Italy or Spain, for example, can be extremely complex," he says.
"If a client in London is subcontracted to one of these other firms and it makes a mistake, there could be a claim. Firms need to make sure the arrangements they have are sufficiently strong so they are protected. They also need to make sure that the firms they work with have satisfactory cover."
Bowen also cites the far bolder audit procedures and protocols used in the UK.
"When Enron hit the news it was thought within the international accountancy community that the US should endeavour to apply standards as rigorous as those applied in the UK. Since then, many procedures have been 'equalised', with the UK often supplying the benchmark."
Procedures, rules and regulations are also helping to boost the PI market.
After the FSA regulated the general insurance industry, brokers have seen more clients through their doors looking for PI cover. "Everybody selling general insurance products will require some form of PI cover and this is a new business opportunity for us," says Dore.
But it is not only new markets that are improving the penetration of PI cover. Technological development has brought easier access to PI products, a trend that is set to benefit both the insurance industry and its clients.
"Underwriters and brokers can get risks placed quickly and contract certainty policies can be produced at a touch of a button," explains Roddis.
- Chris Puddefoot, vice-president of Finpro, Marsh's professional liability division, agrees. "Electronic placement will bring more opportunities. Small PI risks can be placed over the net with cost benefits for both insurers and brokers. There is also the benefit of contract certainty.
"The internet has become a one-stop-shop. We will see smaller risks, which are dealt with by only one carrier, being placed over the net."
If increasing claims and litigation lead to greater awareness of PI products, in turn representing a growing market for the insurance industry, costs are also likely to get higher.
In a softening market, it remains to be seen when insurers will make a bold move and reverse the rates downward trend to recoup profitability.
In any case, with new markets yet to be explored and no foreseeable capacity issue, it seems as if the PI market still has plenty of room for growth.
As Bowen emphasises: "There is a greater awareness of the necessity of buying PI cover and this is manifest in the growth of the market.
"But PI is still undersold to many sectors such as the emerging professions. The challenges for brokers and insurers are to educate those sectors about the risks they face and to provide sustainable, long-term risk transfer."