How to deal in a hard market

Since 1998 I have been predicting a hardening professional indemnity (PI) market and the reasons why it might happen. Some of the predictions, such as the demise of the Solicitors' Indemnity Fund and the pensions problem have turned out to be correct and others, such as the millennium bug, rather less so. What is true is that a hard market has arrived. But what is the best way of tackling such a market when obtaining terms from underwriters and selling to clients?

The last time of real shortage of insurer capacity was in the mid-1980s, which means that many people who consider themselves experienced have not seen the effects of a hard market.

Insurer capacity has reduced partly because of the world economic state. Technology shares are priced in groats these days and world stock markets are trading at two- or three-year lows. The equity, which backs the market, is worth less and hence the ability to write large quantities of premium is reduced.

Capacity shrinking
There have been one or two high profile retreats from the PI market, the most significant by far being Independent's large book. All this business had to be written elsewhere and much was written at far higher prices and is still being replaced today.

So, with capacity shrinking, business from failed or run-off insurers needing a home and a desire to make real underwriting profits has led to a hardening of PI premium rates.

The hard market should be a time of unbridled joy for brokers, but all too often it is spoilt by a feeling of helplessness due to lack of market in which to operate and a selection of very unhappy clients who do not understand the markets.

Consider the client side. He might be an architect or an accountant and you have renewed his PI policy at steadily reducing rates for the past ten years. His fee income has grown steadily over the years and there may have been a little claims activity, but very often the annual cost of his PI has caused him little or no concern, as it is only just above his biscuit budget in his list of annual expenses. (I exaggerate, but in 1984-85 an accountant might have paid 3% or 4% of his fee income for PI and, until recently, the rate might have been as low as 0.5%.)

So, a rise in premium comes as a shock. A rise in the rate (premium expressed as a percentage of fee income) comes as a bigger shock; and a rise in the rate combined with increased fee income declared by the practice requires some non-standard lion-taming skills, as the client is liable to go apoplectic. I have just renewed a risk where the fee income doubled and the rate involved a four-fold increase in premium.

Clearly, the client will not forgive you presenting him with a massive increase at 5pm on the Friday before the policy expires on Sunday, leaving him no choice but to renew; you will lose the risk at the next renewal.

The expectations of the client need to be managed; he needs to be persuaded that the new premium, although unattractive when compared with last year, is competitively priced and that an effort has been made to check this. A clear demonstration of what alternatives are available is essential. Has the risk been properly marketed? Have all available markets been approached? If so, then the range of options can be set out (if there are any) and the client may begin to understand the concept of market forces. It is at this stage you may be able to gently raise the importance of continuity. Managing expectations is key.

On the underwriting side, what can be done to counteract the worst effects of a hard market? How can you reduce the possibility of renewal declinatures, delays and a series of requests by insurers for additional information? The key to this is understanding what is in the mind of an insurer, which is difficult at the best of times. Remember, insurers are now looking to make underwriting profits and will offer their capacity, not just to the good risks, but also to the ones that are presented in the correct manner.

This means a fully-completed proposal form. Sounds very obvious, but we regularly see proposal forms that have been completed with questions unanswered, with comments such as "see your records" or "refer to last year's proposal". While it may have been possible to obtain quotes in a soft market on the basis of information supplied on the back of a postage stamp, now information is everything.

Wherever possible, forward a proposal form accompanied by a brochure, corporate literature or a print-off from the corporate website. Insurers are keen to see what is in the insured's `shop window'. Often, such literature provides a more detailed explanation of activities than that within the proposal form. Make sure fees are declared in full - that is past, current and forthcoming - and that details are provided of any overseas work, particularly if it is in the US or Canada. The speed and nature of an insurer's response will be influenced by the make-up and quality of this information.

Rough indication
Perhaps the most common factor that leads insurers to refuse to quote is the claims history of a practice, or rather the lack of information on the claims history. Failure to provide this information will either lead to a refusal to quote or to insurers providing only a very rough indication of terms, which in most circumstances, will be subject to more information.

Claims information should include: a summary of the circumstances; the client views on liability; details of reserves carried by insurers; and any payments, either damages or defence costs.

How long this hard market will last is difficult to answer, although anecdotal evidence based on previous market cycles suggests a year to 18 months. Circumstances may of course affect this, for example interest rates may rise and stock market returns may improve. What we do know from the past is that a return to profit by insurers is important and we must hope that this does not lead to a headlong rush down the slippery slope on the other side of the rate mountain. Somehow, I fear we might be disappointed. n

Mike Dickson is marketing director of PI broker Dickson Manchester