PI and D&O are hot markets at the moment, with new players entering the ring and existing underwriters increasing capacity. But is the bottom line going to suffer as insurers drop rates in the scramble for business? Ben Cook reports

The professional indemnity (PI) and directors'and officers' (D&O) markets were the places to be in 2004. Numerous insurers have either entered, or boosted their presence in the two sectors in recent months. The insurers that have given more power to the pens of their PI and D&O underwriters include: Abacus, Allianz Global Risks, Axis, Catlin, Creechurch, Limit, Markel, Novae Underwriting and XL Insurance. And if that isn't enough to make PI and D&O underwriters at rival insurers break out in a sweat, there is yet another company looking to muscle in on the action. Bermuda-based Quanta is currently awaiting a decision from the FSA on its application to write professional risks business in the UK."There might be too much capacity in the PI market," First City partner Kelvin Curran says. "If you looked at capacity last year, there are now a number of new companies that are looking to write quite substantial amounts and the only way they can get these accounts is by taking them from somebody else." While more capacity in the PI market may benefit insureds as rates come down, the new market players are not welcomed by underwriters already operating in the sector. "It's good news for clients but bad news for insurers," Curran says.As the battle for market share heats up, insurers are resorting to increasingly desperate measures to bring in business. Curran has seen some very cheap rates quoted for PI cover, but doubts whether insurers will be able to make a profit by adopting such a strategy. "You think, is that sustainable? We're seeing some fairly big chasms between markets and it undermines client confidence," he says.A leading Lloyd's PI underwriter says some insurers are slashing PI rates by up to 40% in order to buy in business on the cheap. "There's an awful lot more PI capacity in the market. Our income is probably down 15% this year," he says. "I'm disappointed that the market hasn't kept a rating discipline. I don't think you can knock points off every year and expect to make money. If someone is regularly knocking 30 or 40 points off the market, it's not profitable underwriting."The Lloyd's franchise board is alert to the issue of PI price wars. With capacity flooding into the market, the board has already sounded a warning to PI underwriters at Lloyd's, saying it will stop them underwriting if there's any sign of undercutting on rates.Curran says there are additional ways of keeping the market disciplined. "The capital providers will be looking closely at what they [PI underwriters] are doing. They are the checks and balances that will keep the market on an even keel," he says.It's a different story in the D&O market. While the amount of capacity has substantially increased this year, there is room for significant expansion of the market, particularly in the SME sector. "People who have been in the market for the past ten years will say that [there's too much capacity] but those markets have had it too easy for too long," says Catlin class underwriter for D&O Julian Elms."The D&O market has reached its peak, but it was a market that was in shell shock after Enron," he adds. Elms says the market has received some much-needed strengthening as a result of the influx of capacity. "Capacity is now here for the longer term. There wasn't so much capital in the past, but the market is now better able to withstand problems because the risk is spread wider."Catlin has identified the SME market as having tremendous potential for D&O insurers. "A lot of mid-market companies don't buy D&O. If brokers take it more seriously they will find there is a big take-up," Elms says. But Elms says many brokers still have a lot to learn before they fully understand D&O insurance. "Brokers need to be educated about D&O knowing, for example, the new Companies Act and the review of corporate manslaughter."

Which players are boosting their presence in PI and D&O?The professional indemnity (PI) and directors' and officers' (D&O) markets have attracted a considerable amount of new capacity in 2004. Among the insurers to have recently strengthened their presence in the two sectors are:

Abacus Syndicate 2526 began trading this year. The new venture is targeting £40m of PI business in 2004.

Allianz Global Risks General manager Horst Hanauer announced last month that the company was entering the D&O market with £33m of capacity.

AxisThe Bermuda-based company announced last month that the company had begun underwriting PI and D&O business in the UK.

Catlin Insurance Company (CIC)CIC is aiming to write £150m of business, including PI and D&O, in 2004.

CreechurchThe Lloyd's managing agent increased its PI capacity by 40% in 2004. Creechurch is expecting to write £12m of PI business this year, compared to £7.5m last year.

Limit Upped its UK PI capacity by £12m in 2004. The insurer is expecting to write £92m of UK PI business this year, representing a 15% increase on the 2003 total of £80m.

Markel Increased its PI capacity by £22m this year.

NovaeFormally launched in April 2004, Novae is targeting both PI and D&O business.

QuantaCurrently waiting for FSA approval to begin writing professional risks in the UK, Quanta recently recruited former SVB PI underwriter Mark Wheeler.

XL Insurance Professional XL announced last month that it would be offering £13.6m in European primary D&O liability capacity.