With the recession pushing insurers to tighten up on claims payouts, out-of-pocket clients are setting their sights on the brokers, whose professional indemnity claims will likely push up premiums. So how best to deal with this double assault?
In a messy and long drawn-out case currently stumbling its way through the High Court, a major UK broker is fighting a claim of negligence and breach of contract from a client.
A wholesale broker and several insurers have been dragged into the quagmire. The client, a property company, argues that the broker failed to obtain the insurance policy it was instructed to obtain. The broker responds that, in any event, the client didn’t lose out because the policy can be fixed to meet its requirements. The next trial date is set for October, and there is no end in sight.
Painful, time-consuming and expensive, such cases are becoming all too familiar in the UK courts. As revealed by Insurance Times last week, one major PI insurer, QBE, has seen claims against brokers rise 50% since 2007. The insurance industry has long sold indemnity policies to its professional colleagues in areas such as law and construction, but now it must turn its gaze on itself.
Pointing the finger
Should brokers really be in the dock – or are the increased claims against them simply a result of gung-ho clients looking to make back a buck in the face of a deep recession? Perhaps it’s a bit of both.
“In their day-to-day working, brokers need to be forever vigilant in servicing their client demand and needs, and the application of a high standard of skill and care,” says Miles Emblin, an expert witness and mediator for the insurance industry. “Such a permanently high threshold is, of course, difficult to maintain at all times, but once the client realises that he is not going to get his claim paid, he reaches for his solicitor, who immediately looks at the intermediary for possible negligence claims opportunities.”
Towergate Professional Indemnity’s managing director, Alan Eyre, says what makes brokers high risk is the potential for error and lack of documentation that could leave them exposed to legal proceedings. “The issue is that if the broker doesn’t document properly, he will suddenly find the client comes back and says the risk was not explained.
“My concern is not so much on the letters and information that go out to clients but the notes that are maintained following client visits and conversations with clients. It’s really about documenting these and less about the compliance process of confirming terms, and so on.”
Eyre adds that the client cannot be expected to read the entire policy. “Cover notes and policy documents are all very well, but is it reasonable to expect clients to read them cover to cover? No, they are not, because they are going to rely on advice they get from their broker in his placing arrangement of the cover. That’s why brokers could still be exposed.”
Ramping it up
You can’t just blame the brokers, though. Research from Biba released last week shows that 58% of brokers have had to fight harder to convince insurers to stump up payments as they fight to keep down costs. And when the insurer won’t pay, the broker can be left carrying the can. Inevitably, this has put pressure on rates.
All the major insurers specialising in this area – including Zurich, AIG, and QBE – have said they will increase rates in 2010 – some by as much as 20%. “Insurers are incurring costs in defending these claims, and this is likely to increase the premium,” Lockton associate director Neelay Patel says.
Last week, QBE’s head of PI, David Harries, said the insurer would ramp rates up after the firm experienced a 50% rise in claims notifications since 2007.
So now a commercial broker with a turnover of £1m in fees and commission would see average premium rises of £1,400 from £7,000 to £8,400 if rates increase by 20%. This is not a complete surprise, according to Patel. “Insurers have talked about increasing rates for brokers for a number of years now, especially for commercial brokers.”
Eyre believes the rate increases could even top 25%. He points out that some legal firms have already seen PI premiums spike 25% and those practising conveyance even more. He says that rates are not as elevated for brokers yet, but that they have the potential to equal the legal profession’s.
“We are seeing the first serious signs of rates hardening across what I would call the higher risk sectors,” he says. “Within that, I would say this includes insurance brokers, financial institutions, the legal profession and certain elements of the construction professions.”
Cause for hope
But some commentators believe that the increasing competition in the PI arena could save the broker industry from facing higher premiums. New entrants could provide cheaper cover for brokers struggling to pay exorbitant premiums. Newcomer Zurich, for example, has said that its rate increases will not be affected by increasing claims against brokers.
“We have a fairly young account and have been writing general PI for just over a year and a half,” Zurich professional and financial lines manager Gail Cook says. “There is a need for some rate increases to take into account things such as lack of investment income and increased cost of reinsurance. The claims for us are not driving the rates. It will be single-digit low-end increases of 1%-2%.”
Certainly, the increase in premiums has not been felt yet. Biba technical services manager Graeme Trudgill points out that broker claims have still not overshadowed problems associated with solicitors’ PI. “We have seen solicitors’ PI increase as the smaller London-based conveyance solicitors have made claims, but we are not having significant price increases for broker PI. The market still has a lot of capacity.”
At this stage, brokers’ PI cover has not increased to alarmingly unaffordable heights. But Eyre believes it is only a matter of time before brokers are seen in the same light as the legal profession. And if brokers do follow the trend, it will be the small and medium firms that could be the hardest hit. IT
A 20% increase in a brokers’ PI rates will surely add yet more weight to the pressure felt by the industry already, alongside increases in regulatory fees and customers looking to save money.
As a new company, attacking business regularly means we have to sacrifice sometimes up to 30% of our commission to obtain new work, which we are happy to do in order to grow our business. But with the added financial commitments of rising costs, a future increase in PI means things would become even tighter for us.
On the other side of the coin, insurers are reporting an increase of up to 50% in PI claims being made against brokers, with half of that actually being settled. Economic climate aside, if these are valid claims that are being paid out, then we have to accept the increase and get on with it. Insurance companies are businesses, not charities.
I think a lot of people are feeling the pinch, no matter how slight or severe. Personally, I think the only thing we can do is suck it in and carry on.
Okay, it’s not great – I would love to see about a 20% decrease in rates – but insurers have to manage their operating ratios. I’d do the same in their position.
Matthew Stringer, Bloomhill Insurance Solutions