In previous articles I have predicted hardening rates in all sectors of the professional indemnity (PI) market. In some areas, such as financial services and surveying, this has already started to happen. The fall out of the pension review process swiftly followed by the current scares over free standing additional voluntary contributions (AVC) and endowments has pushed rates and, perhaps as importantly, excesses, up to levels where the annual renewal constitutes the biggest overhead for many
For chartered surveyors, premiums have fallen steadily since the days of the 1990 property crash when premiums rose to such an extent that they began to affect the very viability of many companies. An underwriter recently told me that the market has failed to make money on the class for all but one of the past 19 years.
Claims from surveys are on the increase and with the current blip in house prices we have started to foresee the spectre of overvaluation claims as negative equity threatens once more. For those firms with a high proportion of survey and valuation work there is little market left and significant rate rises are already occurring.
Brokers have had the advantage of insurers wanting their own PI business as a way of attracting other business that the broker might control. One insurer after another has taken upon itself to woo the broking community with keen rates for their own PI. For a number of years London & Edinburgh (L&E) wrote vast quantities of brokers' own PI at premium levels, which, with the benefit of hindsight, were unsustainable. With the take-over of L&E by Norwich Union (NU) more than a year ago and the almost instantaneous retreat from the market by NU was the start of the trouble. The baton was picked up by St Paul which agreed to “take over” the book and secure cover that was still available at keen rates.
A number of affinity schemes also ran offering cover at unprofitable rates. The simple fact is that brokers' own PI has been underpriced for a number of years. Those brokers with a financial services division might not have noticed this recently but the firms that are predominately personal lines have benefited.
What we are seeing now, and it has become pronounced in the past few weeks, is that the main players in the market have started displaying symptoms of a hardening market and one that is hardening rapidly. Premiums are increasing while excesses are rising and lines sizes reducing. One major writer has reduced its line from £5m or even £10m to only £1m, therefore there is not only a price rise on the primary layer but the “double whammy” of having to arrange a separate excess layer which is always more expensive than when the carrier could write the whole amount. Increased excesses serve to add to the pain.
So are claims increasing? Dickson Manchester Underwriting places cover for more than 1,000 firms of non-Lloyds brokers and intermediaries and with the obvious exception of financial services, where the claims activity has been ferocious, I do not believe that there has been a dramatic increase in claims activity.
The fact is that brokers, especially those in the commercial sector, will always produce some claims activity. It is well known that in times of economic downturn claims activity against brokers does increase. Brokers, in my opinion are getting better: they are better trained, better supported by IT and, one hopes, better regulated (although the jury is still out on that one).
I think that premium levels have simply sunk too low to deal with the normal level of claims.
One insurer confided to me that its book of general brokers was performing worse than its book of financial services risks and it has signifi-cant books of both.
While it is not my field, I understand that re-insurance will be in short supply next year and this will fuel the increases.
So how does a broker, looking to renew his policy in the next 12 months, approach this problem?
The advice from Dickson Manchester Underwriting is:
Continuity is desirable, we all know that and we also know it is usually the first victim of a hardening market. If you are forced to move insurers then make sure that your cupboard is bare of skeletons. Send a memo to all staff well in advance of renewal telling them that you are completing your annual declaration for PI and that you need to identify any possible claims matters that have not been notified. This will allow you to notify anything to existing insurers prior to renewal and will also demonstrate to a new insurer that you have taken care in your submission.
Finally, do not panic.
If a hard market arrives with a vengeance remember that you will likely benefit more from increased rates than you will suffer. You spend much of your time explaining to non-insurance minded clients why their premiums have risen, so be prepared to accept the same explanation yourself and use your “insider knowledge” to limit the effects.