Predictions of a general spike in rates for PI cover have not been realised. Surveyors and solicitors are suffering as more claims are made against them but, elsewhere, competition means that the market is underwriting for income rather than profit
For all the fears of a spike in rates as the recession increased claims, it appears that intense competition in PI is keeping prices pegged in all but a few high-profile sectors. Admittedly the increases in the affected sectors, primarily those connected to property and construction, are steep. However, the consensus within the industry is that, overall, PI rates are flat and are likely to remain so.
“Other than for certain trades that have been quite badly clobbered by rate increases, like surveyors and solicitors, the doomsayers were wrong,” Clear Group’s professional risks director, Daniel Innes, says.
“Those who thought that increases in the market were going to happen haven’t seen them. We are still seeing soft rates for all clients and it’s as flat as it’s been for the last two or three years, horribly flat.
Innes’ view is echoed by Aviva’s senior class underwriter, Andrew Mitchell. “The mainstream market is soft and remains extremely competitive,” he says. “The only exceptions are solicitors and surveyors.”
A combination of the recession, which has sharply reduced clients’ earnings, and market over-capacity have created something akin to a perfect storm in PI, leaving insurers struggling to improve rates despite an increase in claims.
“Most clients, particularly those connected to construction, are seeing large falls in income,” Towergate’s retail managing director of PI, Alan Eyre, says.
“Premiums for those companies are effectively based on their income, so they are expecting to see a reduction in pricing when it comes to renewal, and that means insurers are under pressure to be competitive with their rates. There’s no real sign of that changing at the moment.”
At the same time, the increased profits that PI enjoyed in the so-called glory years of 2002-05 attracted the attention of large insurers and others, including managing general agencies (MGAs) and direct writers. Their entry into the sector has left the PI market with a glut of underwriters and has kept a brake on premium increases.
“MGAs definitely keep pressure on prices,” Mitchell says. “Direct writers are a factor, too, but there’s not a huge awareness of them in the traditional professions, who prefer to stick to specialist brokers.”
While brokers and insurers bemoan the lack of momentum in prices in most sectors, clients in the areas most badly hit by the recession are facing huge spikes in premiums, and in some cases withdrawal of cover.
‘Some insurers do not want certain risks’
Insurers who cover surveyors and solicitors are taking fright at the sharp increase in claims against both professions, due mainly to the UK’s spectacular property crash over the last two years.
Despite growing criticism, banks and other lenders are still threatening solicitors and surveyors with legal action for overvaluing properties during the boom.
Innes says: “Surveyors have been penalised horribly and solicitors, too, especially firms with a low number of partners. We have heard of two-partner solicitors facing 200%-plus increases on premiums – and their information was fundamentally unchanged from the previous year.
“Some insurers just do not want certain types of risk and are pulling out of those sectors. Because of the nature of solicitors’ PI, where it is all due on one day, it’s very easy for insurers to say ‘we no longer want any of this business’. So rates rise horrifically or clients simply can’t get cover.”
In fact, the market for solicitors has hardened so much that last October’s renewal season saw the number of law firms in England and Wales entering the assigned risk pool – with its 27.5% premium rate for the first £500,000 of cover – doubling to around 500 firms, or 5% of the total market.
“Normally, when the housing market is fine, surveyors’ claims are generally to do with defects; things that have been missed in the survey,” Markel (UK) underwriting manager Simon Fell says. “The problem now is that claims are linked to valuations. People are defaulting on mortgages and, because of that, we’re seeing an increase in over-valuation claims as lenders seek to recover their financial loss.
“A lot of those claims are being pursued by financial institutions that have the mechanisms and clout to pursue those actions against surveyors and solicitors.”
Eyre adds: “Solicitors undertaking conveyancing have to follow certain guidelines. If they fail to meet those in terms of either disclosing information or following all the necessary processes of the conveyance, they could find themselves exposed to a claim. Lenders are now looking at a number of conveyancing transactions very closely, with the aim of finding a potential weakness and making a claim.”
The use of so called ‘confetti letters’ by lenders – mass mailings from ‘no win, no fee’ solicitors usually accusing surveyors and solicitors of negligence – is widely seen as another example of UK banks’ desire to find somebody to pick up the bill for their own transgressions.
Bearing in mind the banks’ largesse when it came to lending, the courts may well decide that these lending policies contributed far more to their losses on property transactions than did sector foot-soldiers like solicitors and surveyors.
That, however, is unlikely to offer much comfort to the insurers of those currently being pursued though the courts.“The problem is that these claims take time and money to defend,” Eyre says. “They cost insurers dearly and those costs get reflected back in insurance premiums.”
And things could get worse. In addition to increases in claims against solicitors and surveyors, a recent report revealed that 13 claims were heard against accountants in the High Court last year – a sharp increase on the previous four years, when only four claims were heard. The likelihood is that there will be more claims against other professions in the coming year.
Beware the backlog
“There’s been a big change regarding financial advisers,” Fell says. “Certain investments have failed because of their backers, like Lehman Brothers and the Icelandic banks.
“We’ve also got a situation with pension investments, where the expectations of customers aren’t being fulfilled because of the current economic climate and the fall of the FTSE. It’s not necessarily the fault of the financial adviser, but a lot of people are now, with hindsight, challenging the original advice they were given.”
Insurers are also seeing problems in management liability. This could affect those offering directors’ and officers’ cover as claims start to arise from allegations of wrongful or fraudulent trading.
In fact there is a time-bomb of pending claims ticking away. “In an economic downturn, there are more disputes because people aren’t making the returns they were hoping for, and they look to recover costs. Those claims take time to filter through and they hit the insurance companies where it hurts,” Eyre says.
His view is confirmed by Fell. “There’s a slight backlog in processing these claims,” he says, “because the number of notifications is probably unprecedented. “You’ve got to be careful because the claims experience you’re currently carrying for a particular class might not be accurate.”
Fell sounds a note of warning: “The financial ombudsman could still be reviewing the files and it may be six months or 12 months before something starts to happen. You could have existing notifications on your business that haven’t realised into a true notification because it’s still waiting for the process to be properly gone through.”
But surely it follows that increased claims must at some point lead to increased premiums? “It should follow through and it will have to at some point,” Fell agrees. “We are getting to the stage where we are seeing that there are difficulties in certain classes of professional indemnity. We would hope to see things moving in terms of rate changes, but it will affect certain professions; it won’t be across the board.”
The last straw?
There is a school of thought that the Irish Financial Regulator’s decision to force Quinn Insurance into administration and prevent it writing any new business in the UK – to avoid “further financial losses from its currently unprofitable UK business” – could prove to be turning point for the PI market.
Quinn is a major underwriter of solicitors’ PI providing cover for almost 3,000 UK law firms. “The situation with Quinn may make some insurers sit up and take notice, or it may lead to a feeding frenzy for the better bits of business, which will keep things flat,” Aviva’s Mitchell says.
“The soft market has defied expectations. We expected it to be on the up by now but it’s been bumping along the bottom much longer than anyone anticipated. Maybe the failure of an insurer is the catalyst for change.”
But not everyone shares even that guarded optimism. “There doesn’t appear to a genuine sign of an appetite by insurers to increase rates,” Eyre says. “ There is more of an appetite for premium income. I think the market is probably underwriting for income rather than profit at the moment.” IT
Broker focus: Howden
The soft market in professional indemnity can’t last much longer, claims Howden executive director Lance Rigby.
Rigby reckons insurers have been smoothing over the PI market by releasing large amounts from their reserves, but this money is running out. He says there is an overcapacity in the market, as the reluctance by Lloyd’s to allow start-ups in the area or to give the green light to established syndicates looking to move into PI proves.
“Although some people might not like to admit it, it’s widely accepted that PI as a class is losing money,” Rigby says. “The Lloyd’s franchise board has been trying to manage the amount of capacity in the market, believing it to be too soft and not sustainable. Some of the big Plc insurers have been releasing reserves over a period of time to supplement their underwriting performance, but those reserves are running a bit thin now.”
It’s not an entirely clear picture, however. Insurers’ risk appetite varies across sectors, and while most are still keen to write risks in IT-related and new media-related professions, they are more nervous about construction, property and law. The markets in these areas have already hardened as a result. Elsewhere though, prices are still low.
“For the market to harden, a couple of things need to happen,” Rigby says. “We need to see the reinsurance market getting a bit tougher – and we’ve had the worst start to a calendar year for a long time in terms of catastrophic events, so that might be on its way.
“Also, insurance has been a desirable investment opportunity for non-insurance capital over the past few years. There might be a view that that will change as the market picks up.”
Whatever happens, for Rigby one thing is certain: the hard market will return, and the sooner the better.