After an extremely challenging few years, it feels like the Professional Indemnity (PI) insurance market is now in something of a holding pattern as insurers assess the impact of underwriting actions and the overall performance of their PI portfolios. This will come as welcome news to those who have been at the sharp end of those underwriting actions but at this point, a significant shift in appetite from the established market and a broadening of coverage still feels some way off.
Why is that the case?
To understand why that’s the case, it’s important to remind ourselves of what led to the problems experienced in recent years and why, in 2018, PI was cited as the second worst performing class of insurance. We’ve previously reported on the systemic issues that existed within the insurance market, where an oversupply of capital led to poor underwriting behaviours; insurers focused on building market share rather than the profitability of the business they were underwriting. Those failures were inexcusable and it should have been evident to anyone with even a basic understanding of the insurance market as a text-book example of how insurers can get themselves into trouble.
At the same time, there was something else going on. Allied to the difficulties being experienced in the insurance market was a perceived deterioration in the risk profile of the construction professions, with:
- Firms being required to do ‘more for less’ under increasingly onerous contracts;
- Demands for ever increasing levels of PI insurance;
- A trend towards higher value claims; and
- Increased exposure arising from the failure of other parties and the application of the joint and several liability principle.
These factors, together with the very significant risks associated with fire safety, left construction professionals particularly exposed, with many struggling to access appropriate and affordable insurance protection.
So, where are we now?
Today, fewer firms are going to face that existential threat of not being able source any PI insurance cover. The level of underwriting scrutiny and the actions imposed by insurers in recent years have given them a degree of comfort around the risks they hold and there is some evidence of an increase in market capacity overall.
In that sense, it could be said that the market has ‘settled down’ but at a level that many will see as painful in terms of premium and coverage. We shouldn’t forget that many insurers have introduced wide-ranging restrictions that create a real gap between the potential risk exposure construction professionals are facing and the cover afforded under their PI insurance arrangements. Certain sectors will also remain particularly challenging with insurers continuing to look closely at risk and claims profile.
Any increase in market capacity also brings with it a question on motivation and particularly so when it comes to new entrants. No one wants to see a return to the poor behaviours that drove the hard market conditions and, as is so often the case, individual firms and their insurance brokers need to ask some simple questions about the insurers they choose to work with:
- Are they here for the longer-term and is that evident from their structure and resourcing?
- Do they actually understand the risk?
- Are they providing an appropriate and sustainable specification of cover?
- What’s their track-record on claims handling?
- Are their behaviours consistent with those of a prudent underwriter?
If the past few years has demonstrated anything, it’s the importance of making good decisions on insurer selection, trying to build sustainability into your PI programme and ensuring that you are well placed to withstand whatever the future holds.
And what about the underlying risk?
The future is far from certain. It’s remarkable to reflect upon the last few years – inflation, interest rate rises, the UK’s exit from the European Union, war in Europe and the Middle East, unprecedented challenges on climate change, the Grenfell tragedy (and the lessons that are yet to be fully understood), changes in legislation and the introduction of the Building Safety Act, which will be of relevance to those working in the UK. These issues all raise serious questions for insurers around the likely impact on construction professionals; and that’s why we need to focus on tackling the underlying risk.
The ‘green shoots’ of an uplift in PI market capacity are welcome but they are a function of the usual market cycle and the underwriting actions taken in recent years – they are not the result of fundamental change in the risk profile of construction professionals. And without that change, we are not going to achieve the kind of PI market conditions that those with a long-term market interest wish to see.
So, what are we doing about it?
At Griffiths & Armour, we’re committed to achieving real change and to delivering a more sustainable PI market. As well as helping our clients navigate through the challenges of the last few years, we’ve continued to invest considerable time and resource into advocating on their behalf – working with industry bodies, Government and other stakeholders to improve the commercial, regulatory and legal environment our clients are operating in.
Those efforts are beginning to gain traction but much more needs to be done to achieve the fair risk/reward balance that’s required to:
- Underpin a sustainable consultancy sector; and
- Deliver a stable and competitive insurance market.
What is needed is a more resilient model that can serve the interests of all parties into the future. Central to that will be a move away from joint and several liability; a system which drives claimant behaviours, which places untold exposure on consultants and requires the PI insurance market to bear a level of risk it is simply not capable of funding.
How should firms be approaching their own PI insurance renewal?
While we continue in our efforts to deliver the kind of fundamental change we’re looking for in this area, firms need to think about the more immediate challenge of navigating through their 2024 PI insurance renewal. For the reasons outlined, it may not be quite as challenging as the last few years but adopting a sensible and structured approach will remain key to achieving better outcomes:
- Start the process early – 2 to 3 months in advance of renewal;
- Establish clear goals and timelines at the outset;
- Provide a clear overview of your practice and your approach to managing risk;
- Outline lessons learned from claims or issues that have arisen in the past.
And perhaps most importantly, work closely and engage positively with your broker/insurer, remembering that long-term relationships and a focus on sustainability have always served to minimise volatility and underpin a more robust PI insurance programme.
And what about Griffiths & Armour’s PI Insurance facilities?
As many will be aware, Griffiths & Armour operate several market leading PI insurance facilities that have been proven to stand the test of time. Whilst we are certainly not immune to market challenges, it is clear we have been sheltered from some of the more extreme reactions seen elsewhere.
Having recently renewed our major construction PI facilities, we feel Griffiths & Armour’s clients will be well placed to benefit from decisions made in recent years and a more flexible underwriting approach that recognises the nuances and complexities of each firm. As well as the broader industry activities referenced earlier, we also remain committed to delivering effective risk management to individual clients, supporting them in their efforts to control liability exposure and manage their overall risk profile. Something that is likely to prove vital in managing through any future challenges.
If you’re interested in learning more about our work in this area or how we’re looking to support our clients with their individual PI insurance arrangements, please feel free to get in touch. We’d be delighted to hear from you.
