The PI market: A cycle of uncertainty

A recent BIBA seminar discussed the boom and bust cycle in PI insurance and looked at possible solutions.

At a British Insurance Brokers’ Association (BIBA) seminar in May, entitled ‘Professional Indemnity – A hard market’, four professional indemnity (PI) experts (including Nic Brown, UK Sales and Marketing Director, Markel UK) discussed the issues the PI market is currently facing.

While the market has been soft for a number of years, it is currently going through a period of rapid correction which – while it may be necessary for the health of the PI insurance industry – has come at just the wrong time for businesses, faced as they are with the ongoing effects of Covid-19 and Brexit. More broadly, the BIBA panel agreed that a boom and bust pricing cycle is not good for customers.

Potential solutions that were discussed included shifting from ‘claims made’ to ‘claims occurring’ policies and making those policies longer-term, as well as emphasising the crucial role of the broker in providing a full picture of a customer’s needs, position and culture.

What’s behind the change?

Fundamentally, insurance markets turn from soft to hard when demand for coverage increases at a time when supply has contracted. In the case of PI insurance, the falling number of new entrants to the market, insurers pulling out of it and aspects of cover being withdrawn were all mentioned in the seminar as factors that have contributed to the current challenges.

Richard Brooks, Broker Development Director at Markel, explains that the PI market for large corporates has been particularly soft: “Because of all sorts of different events, from Covid-19 to major global cyber events, a lot of insurers who are in that corporate space have either exited or are putting on transformational rate increases.” Experts also point to the insurance cost of the Grenfell Tower fire as a trigger for the current market adjustment, with the prospect of more major claims relating to cladding and construction making it harder for architects, surveyors and contractors to get PI cover.

Richard also believes that the growth of online insurance sales and aggregator websites has inevitably contributed to the softening of the market. “At Markel, we’re passionate about the depth of our expertise and have always encouraged our brokers to have a conversation with one of our underwriters, so we can finesse the price and talk about our wider proposition. E-trade is a fantastic and absolutely essential means of distribution, but taken in isolation becomes an aggregation device that drives the price down.”

How brokers can help

In the seminar, Nic Brown said that, to end the PI boom and bust cycle, the industry needs to find a sustainable, long-term solution with the right price, benefits and claims approach that will build trust with customers. Adding value through tailored products, claims management and risk management will also be important to help SMEs as they emerge from the pandemic.

So what part can brokers play in breaking the cycle? Richard stops short of citing them as holding the solution in their hands, saying simply that “it’s in everyone’s interests that premiums are kept at a good level and sustainable, because that’s the mechanism by which we can all achieve some certainty of costs and earnings. Clients more than ever need to very carefully allow for their running costs. A soft market hits everybody in their pockets sooner or later - whether it’s diminution of commission, underwriting profit or cash-flow in the case of the customer when the market suddenly contracts again.”

The participants in the BIBA seminar also agreed that brokers can play an important role in working with the customer to articulate what their exposure is, especially in the case of risks that are too big or complex for online placement.

The value of expertise

Richard is keen to point out that the hard market we are currently seeing in PI insurance for larger clients or those operating in higher hazard industries doesn’t necessarily extend to smaller companies operating in more benign sectors. “For ordinary, miscellaneous SMEs and micro-businesses, supply and demand hasn’t really changed. Many insurers are quite naturally looking to de-risk their larger exposures by taking more of the smaller stuff, so they’re perfectly happy to continue to discount,” he explains.

He adds that SMEs value experience and expertise in a PI insurer above all. “Ever since Markel started in the UK, PI has been at the heart of what we do,” he says. “We are a specialist insurer so whatever the market conditions, we have always sold ourselves on our expertise, our quality of wording and our willingness and desire to pay claims. As a consequence of that, whatever has happened over the last 20 years, we’ve been consistent in our pricing. We have always taken a responsible, carefully considered and measured approach which is how we can provide worried clients with compete peace of mind.”

This chimes with the findings of the BIBA panel, where the chair concluded that “professional businesses, looking for the best insurance advice, turn to professional, specialist brokers, who in turn seek out professional insurers who are in the market for the long term”.