Insurance Times in association with HCCD brought together industry PI specialists to comment on the state of the market and look to the future
Chair: The professional indemnity (PI) market is particularly vibrant and fluid at the moment. We have seen a new entrant, Prime Professions, join the market and much movement at Alexander Forbes. So to kick off, have the soft market, and falling rates, caused this situation?
Chris Puddefoot: I'm not sure whether it is a soft market that is affecting rates. I don't think it's as serious as it was in the late 1990s.
But from a capacity point of view there are fewer new faces coming onto the scene, no new faces since 2000. The question is what will the reinsurers do at renewal date? Particularly with capital provisions after the windstorms, will reinsurers try to maintain rates?
David Jones: Is there a problem with underwriting discipline? I think there is. In what other industry can you see prices going up by 20%, 30% and then dropping by 20% or 30% a couple of years later? It defies logic.
We have gone through a period between 1997 and 2001 where £2bn was paid in losses in the PI market at Lloyd's. We then saw a period of correction (rather than hard market). Now we're beginning to see a downturn. We need to address the issue of disciplining underwriters so we don't see massive peaks and troughs in the rating environment.
Chair: Mike, do you see that with the underwriters at the moment?
Mike Dickson: There are, as Chris said, no anticipated new entrants next year, but there have been new entrants this year and the year before. They have to build new books. You can't do that unless you're prepared to undercut the current market, so that might be the discipline that we are talking about.
Mark Roddis: It is not only the insurers' fault. There are a number of brokers here and within the regions able to deal with PI far more easily than they have over the past five to 10 years. We always see it during a softening market that new brokers come in and the London brokers then go out arm-twisting the insurers to make sure that the business stays in London. We also have competition within underwriters and within regional offices of those underwriters. And so as it becomes easier to place insurance, certainly with the technology, the big brokers will say: "We want to hold on to our market share at the lower end." This is the easier stuff to place, and they keep pressuring the underwriters to do so.
Chair: But have you seen cases where, say, an architects' practice, which was paying around £50,000 premium last year, is now being quoted a discounted figure many thousands of pounds cheaper, even though the risk itself has not materially changed?
Roddis: Not the massive reductions, but you have situations where an architect paying £50,000 is talking to three brokers. The incumbent broker tries to hold the price, but is up against a 10 % price drop, so he drops.
When the renewal is up, the broker wants to go at £50,000 they're now going in at £44,000 or even £40,000 just to hold on to the business. The new broker is obviously also trying to hit its targets. Below this level we've seen cases move for £25 having been with the same underwriter and the same broker for five years, and they're moving for next to nothing.
Charles Manchester: The insurance industry has always had cycles. The Shangri La of flattening the cycle out is unlikely. That means brokers and underwriters should always have interests aligned, and that just isn't going to happen, particularly in the brave new world of FSA regulation.
This year has been characterised by brokers, even when not necessarily facing competition as a broker. Looking over their shoulder at the FSA and they are thinking: "We'd better get 15 quotes for our clients, just in case somebody criticises us." That is a sort of vicious circle of driving the price down. Even on the larger cases, where brokers are working for a fee, they will be driving the price down, because they feel obliged to. The double whammy is that the larger brokers have lost their overriders and their profit shares so they're under pressure on commissions and need to get new business. It's not pretty, but, on the other hand, it's right.
But it isn't as bad as it was in 2000/2001, when the discipline didn't exist at all. Now there are some differences. We will see this in the reinsurance renewal season, but last year the reinsurance renewal season was not that soft, reinsurance tended to hold the line reasonably well.
The way the market has softened means that the direct carriers must be retaining more risk. But if they're retaining more risk by doing it, then the losses will crystallise on their balance sheets that much quicker.
The problem as well is that PI is a long-term account and it's been characterised in the past by a number of reinsurers with a sort of blindly-optimistic reserving philosophy. By the time the claims come in, the underwriting team has moved on. You could move on every few years and never show an underwriting loss.
Chair: Andy, you were nodding there about the reserving issue ...
Andy Dore: I was also interested in what Charles had to say about market cycles. My observation is that the market cycles are getting shorter.
If you look at the past four or five years, we've had two of the biggest losses in the insurance market - the World Trade Center and this year's hurricane season. As a PI market we're not actually in control necessarily of our own soft or hard market cycles. We are affected more by capacity issues and reinsurance costs that are driven by catastrophic losses to other markets. We don't have necessarily the big catastrophe markets in PI at the moment, so we are effectively hostage to market forces in other sectors, rather than dictating them ourselves.
Michael Wood: It's all a question of how much capacity stays in the liability market. But, as soon as people see increases in rates on property, you have people chasing all rates. The FSA is looking at some insurers, and if it starts to tackle controls on the management, this is a good thing. One problem with PI has always been that it's very hard to find historical statistics across the industry on PI. You need senior management at underwriting director level going into liability and separating out PI. One of the problems when writing solicitors' PI is that you have to be very focused on their profession. I have to wonder sometimes at the people who write solicitors' PI and throw it in their book and hope that overall their liability book will cover it. It sounds radical, but eventually we should look, as an industry, to swap statistics every now and again. Wouldn't that be great?
Trevor Meadowcroft: The problem you'll find there is that the ones who have bad figures will hide them because they'll be too embarrassed to show losses. The ones with very good figures will say: "It's my secret, not yours."
Manchester: The FSA's role is to ensure that the insurance carriers are there to pay claims. So if an 'AAA' rated insurer decides, for whatever reason, to cut its rates by 95%, the fact that it is a small part of its overall book of business that it is cutting means the FSA won't be interested.
Chair: The FSA says it is reviewing the solvencies of all the major carriers. Should its role be to keep track of them?
Manchester: Well wouldn't it be nice if insureds thought about the solvency of their insurers when they bought the cover. It was AIG's Hank Greenberg who said a couple of years ago, oddly enough, that you wouldn't put your pension money in a 'BB'-rated fund, so why would you put a long-term liability that protects your business against going bust into a 'BB' or 'BBB' rated insurer? You want an insurer that's actually going to be there in five or 10 years time when the claim comes in.
Chair: Let's bring Nick in. Should the broker be there to educate the insured more?
Nick Lunson: The answer is of course yes. Long term it is in the broker's interest to tell the client how the market's going to work because we try to make sure the client doesn't have any surprises. That's one thing he doesn't want. We have all seen the dynamic of the marketplace, it's going up and down very quickly. And the client doesn't want that, the client just wants to see a nice steady line comparable to his turnover.
What he wants to know is where the overhead is going to be, and as a market we're pretty useless at providing him with a steady line that is comparable to his turnover.
If we look at your own business you want to know what your overhead costs are going to be, what the operating costs are going to be and what the profit is going to be, and that is what shareholders are interested in. So when there is no fixed price, the client suffers.
Once the returns start producing they're going to find another market to put capital into, and that's US property, not the UK PI market. Fifteen years ago, even 20 years ago, to get a PI quote you had to go to a specialist PI broker in London who knew what he was doing. Now everyone is a PI specialist.
Manchester: Nick's absolutely right. His shareholders are concerned with the return on their capital and that depends on the amount of income he makes. But the amount of income is not necessarily influenced by the profitability of the insurers. These days it is less so than it might have been in the past, pre-Spitzer.
Chair: Trevor, how's your relationship with your brokers?
Meadowcroft: Oh wonderful. The initial conversation was about where were we are in the market at the moment. We're in a very fortunate position because we have a useful barometer. This year all the solicitors' renewals took place on the same date, 1 October. If you want a useful barometer of how things have gone, look what's happening with solicitors. This year the limit of indemnity doubled. Solicitors' fees no doubt have increased, and there is more claims activity.
Chair: As we've picked up on solicitors and the impact of The Accident Group, we are asking the question: are negligence claims linked to the rocketing number of personal injury claims?
Manchester: The Accident Group is for a specific set of circumstances.
Personal injury solicitors have always been very exposed to claims, particularly with deadlines. Potentially they can be more expensive than the average claim against, say, a criminal lawyer.
Jones: Well there are good underwriting reasons why you do, but this comes back to non-solicitors. When you write solicitors' PI, not only do you have the insurance risk, you also have a credit risk, because if they don't pay the premium you must still pay the claims. If they don't pay the excess, you as the insurer have to pay. Therefore, when you are looking at solicitors, and this is one of the concerns we have with the way some people are writing solicitors' PI, they're not really understanding what they're taking on.
Manchester: Am I missing something with solicitors? The Solicitors Indemnity Fund (SIF) didn't disappear because of its abnormal profits.
It is the largest single profession out there that has a history of almost every year losing money for the professional indemnity market. We have a common renewal date, which fuels rate reductions. The common renewal date happens to be in the last quarter of the year, just when those that aren't making their premium income targets would maybe have the last chance of getting close to them. The market is focused into primarily a few specialist brokers who really know their stuff and really know how to screw the last juice out of the underwriters. You have the widest wording I've ever seen in my life. They managed to get a dozen-odd pages out of it, but they might as well just say it's covered. It even covers deliberate non-disclosure, although you can subrogate against the bloke if he runs off to the Maldives with his client's money. I just can't see one thing about the profession that characterises it as one to grow in, not least in a softening market.
It's just beyond belief that anybody would want to grow it. Now it may be there are people around this table that can pick the risks and write a modest sized book and make profit, and that may be feasible. To take a significant stake in that kind of a market just strikes me as blatant suicide.
Jones: Also when SIF went down, it was kind enough to give us all its statistics, so you could see where the problems were.
Dore: We were one of the muppets last year who thought we could risk-select a handful of cases. It's even less now, probably two or three cases on our books. But most of the players now are not Lloyd's players in the market, they are the large insurers who really seem to be trying to generate a large market share. That's the only way you can make a profit from the book in the long term. It is potentially investment income. You can burn off the premiums for a period of years before you have to pay any claims. If you try to dabble, as we did last year, you can't possibly succeed.
Manchester: It's not the way to underwriting happiness, to rely on your investment returns.
Chair: But on that point, as both David and Michael observed, should there be some kind of independent body that keeps industry statistics?
Manchester: We live in a competitive market and we want a free economy.
That means that people have the right to make decisions for themselves.
You can't have people telling them, "thou shall not write solicitors' at suicidal rates".
Wood: It is about the frequency of claims that you get with solicitors' PI. You need an efficient claims handling service for it. We don't target the small practices, only the top five firms. What you do see happening is that they will tend to stay and also get a decent claims service. The problem is when the product is regarded as commoditised. It's just a claim and it doesn't matter. But solicitors seem to have short memories. They're quite happy to move for £50. We have had situations where people have moved and then come back to us because of the poor claims service.
Chair: I was going to raise this point because of the Compensation Bill. It is offering some kind of statutory regulatory regime to tackle claims farmers. Will this change the market?
Dore: It won't change the solicitors' market. We've had a one-off hit with TAG and one or two other claims farmers. There's no sign that it's to be repeated year on year.
Chair: How competitive is the broker market?
Roddis: The broker market is not dissimilar to the insurer market. As a whole, professional indemnity is seen as having made money over the past five years, and there's no reason why anyone wouldn't want to get a piece of the action. And if you wanted to launch a start-up and pinch 30 people, it would be quite an expensive investment for any broker. But if the cost is 30 people's salaries to have X amount of business guaranteed ...
Chair: If the business at the moment is that competitive, can you guarantee that poaching a team like that is going to bring business?
Roddis: Certainly at the smaller end, the smaller brokers, you do see two or three people walking and taking their clients. But when it comes to the larger brokers, is it the team or the actual name, like Alexander Forbes, Marsh, Aon. Throughout the market people want to be with the major players. In the tender process it is the same three or four people at the final stage, and it's those big names, rather than the second tier of the PI market.
Puddefoot: It's very difficult in a large broking house to walk with cases.
Chair: Is that what you think at Marsh - that you are more competitive against some of the super-regionals, because of the infrastructure and service you offer?
Puddefoot: In London we're dealing with high value and lower volume business. The competition we see will be from Aon, Jardine Lloyd Thompson, Willis, not from regional brokers or other national brokers. We can place business through our regional offices and these offices can make use of the London resource and advice, and also have access to the local markets as well.
But do all insurers understand the value of the customer services they provide? Do brokers? I don't think they always do. Plus we are not very good at protecting our own intellectual property.
Wood: I don't envy the team that's left Alexander Forbes. I wouldn't want to start a new book from scratch now. It's bloody hard work.
Manchester: Brokers don't know the cost of services, not least if they're large multi-divisional brokers, because they get into arguments at senior management level over breaking down head office costs and they never actually know what the cost of running any particular division is, beyond the salaries in it. Rarely do teams move and take as much as they're promising to their new bosses. The reality is that PI business is institutionalised and it won't move that easily. Some will. Regional brokers are getting a lot better.
Jones: Regional brokers now have more access to regional markets. For example, we have six offices around the UK which regional brokers can plug into. They couldn't do that some years ago. They all came into London.
So London's becoming more distressed with the capacity risk, while the regional offices are picking up SME business.
Chair: It's also the point that Mark made about the subrogation of brokers. These third party brokers learn from you, get to know your clients and end up taking your business. Is there a long term value in wholesale broking?
Manchester: A wholesaler has to add value. What has changed in the dynamics of the market in the last few years is the broader access to insurers that Nick referred to.
Second, we have FSA regulation, and so the cost of doing business for brokers will increase. At the very least they have to document their advice so much better than they did in the past.
Wood: The extent of claims in many lines of insurance, not just professional indemnity, is economy-driven, and if the economy slows down then the construction industry will slow down. If the construction industry slows down, then people in it start making less money or losing money. When people lose money on building projects, then they sue people and fires start. It's funny, but when there's a slowing economy things burn down.
Puddefoot: Plus fraud. During the recession in 1991 there was an enormous number of fraud claims, which were economy-driven.
Wood: One of the things which highlighted the valuation claims in the surveyors' market during the early 1990s was the fact that there was low inflation. Even in the early 1980s and the middle 1970s, there were still valuation claims which emanated from poor valuations.
But, because of inflation, there was a drop in building values. The concept of having a valuation claim didn't go away and any time the property market starts to drop, especially when there's low inflation as well, it will give rise to claims.
Manchester: Insurers write business at inadequate rates on broad covers and then they regret it later, and when they can start to say no, brokers are caught in the middle. For example if a broker places a large commercial property risk with a high sum insured a loss can be many millions of pounds.
The commission or fee that your company will have made from it is a tiny proportion of the exposure. Commercial brokers have a very serious exposure.
Lunson: We're going to see bigger risks going into brokers that hitherto haven't had those sorts of exposure.
Chair: I'd like to go around the panel and ask what has the industry learnt and what future trends do we see in the future for the PI market.
Meadowcroft: My concern is that a lot of people don't seem to have learned anything. We saw this in the previous solicitors' PI cycle. You hope that there are drives to bring more discipline into broking and underwriting but as people start to learn the lessons, uneducated people come into the market and think that they can make a profit where other people haven't.
Lunson: As an industry or market, we are not customer-focused enough. In future we ought to listen to what our customers want and what their interests are and try to align ourselves to those needs.
Wood: To a large extent on the underwriting side there should be more energy in educating the public in what they're actually buying.
Dore: It comes back to the comment I made earlier about the short term.
Perhaps we don't get the time to analyse the progressions and the trends before we're back into another market cycle, and sometimes this has an adverse effect on pricing. That said, in the future actuaries are going to play a big part in the pricing of risks across the board. Consequently, there'll probably be less differentiation in market price. It will then fall back to issues of service and product, and go back to that level of differentiation rather than purely on price.
Manchester: Underwriters are only too willing to listen to the broker telling them how clever they are and how they're the people who could actually buck the trend. Insurers do believe that they can walk on water, and it's the point that Mike was making as well, if a company claims, and it has had five claims for each of the past five years, why won't it have five claims this year, because this is the year you're going to write it. Well it doesn't work like that.
Over time it creates opportunities for the sensible insurers, and they grow when the time's right and go down and weather the storm when it's not, and if need be reduce their exposure. If you have the self-discipline, I'm not looking for market discipline, because I think that's Shangri La, but if you have the self-discipline to do that, then there's no reason, over a period of time, why you shouldn't produce returns for your shareholders that are worth having. Perhaps 2006 will be rather better than we've feared.
We'll never know the effect it had on the PI market, but it's probably not going to be as bad as it might have been but for the wind blowing.
Roddis: On the broker side, more lessons have been learned by the client during the hard market and the educated buyer scenario has improved. So we're seeing a lot more risk management in the current climate.
Dickson: I have responsibility for marketing, so I'm very optimistic. We should concentrate on educating both the client and the uneducated broker in the PI market, that's certainly what we shall continue to do.
Maher: Talking from a solicitor's perspective, there is a greater awareness of risk management around the threats. There's more buy-in. At one time it was just the big global law firms which had risk management teams.
Now we are seeing that some quite small firms are advertising for risk managers, and we're certainly seeing a wider spectrum of firms coming to us for help. Looking at the future trends, I just can't believe that the level of premiums can be sustained year on year. At some point underwriters need to wake up to this and decide that it wasn't that successful and the market has to harden.
Jones: I can see the cycle becoming flatter, because, despite what we were saying earlier, there are mavericks out there doing some bloody stupid things. And there are established insurers with much tighter controls.
So there is a greater degree of professionalism and discipline within the more established insurers. Consequently we will get a flat cycle.
Echoing what Andy was saying, the reinsurance market is now going to kick in, having lost a fortune on Katrina, Rita and Wilma.
Puddefoot: One of the key issues in the future is the whole question of contract certainty. From a service position, clients will demand this and of course it is necessary in the London market and should have been dealt with years ago. That's one of the things that the whole industry must get right.
Chair - Elliot Lane, Editor David Jones - Markel
Trevor Meadowcroft - Norwich Union
Andy Dore - AG Dore & Others
Michael Wood - PI Direct
Chris Puddefoot - Marsh
Mark Roddis - Alexander Forbes
Nick Lunson - Oval
Frank Maher - Legal Risk
Charles Manchester - HCCD
Mike Dickson - HCCD