Why is the PI market hardening?
Over the last 15 years the Professional Indemnity (PI) market has operated in what we refer to as a “soft market”. By this we mean that rates were reducing year on year and there was an abundance of capacity in the market with aggressive quoting aimed at winning and retaining business. Generally speaking, the renewal process was relatively straightforward and the insured had a wide range of insurers to choose from. In the last 18 months we have seen a significant hardening of the PI market following on from a Lloyd's thematic review (also known as the Decile 10 review) that highlighted non-US PI as the second worst performing class. Lloyd's syndicates were ordered to prepare plans to restore their PI books to profitability and those that could not demonstrate sound plans were to withdraw from writing PI. This resulted in a number of syndicates exiting the PI market, leading to a reduction in PI capacity.
It is commonly believed that the Grenfell tragedy in 2017 caused the PI market to harden. While it is true that this did contribute to a hardening of the construction PI market, the years of soft market conditions along with the LIoyd's thematic review were also significant factors, and the Covid-19 pandemic has also played a part.
Why you should make an early start on the renewal process
Due to the market conditions and limited underwriting appetites, underwriters are busier than ever as they have more submissions to get through and are reviewing more information with each submission. Getting the renewal invitation pack out for completion at least three months prior to the renewal date is therefore strongly recommended to give you time to pull everything together and to give your broker time to negotiate on your behalf. Regular calls between the insured and broker about market updates are vital, and arranging tripartite calls with the insured/broker/underwriter also add value to the underwriter's understanding of the risk.
Working with your broker is more important than ever in the hard market. While it might be tempting to involve more than one broker to obtain terms on your behalf, be aware that some insurers will prefer to work with just one broker and can lose interest in quoting if they see the risk from multiple brokers.
What information is required?
It is vital to provide a detailed submission to get the underwriter to dedicate their time to underwrite the risk. The days of providing a two-page renewal submission to obtain a contract certain quote are long gone, so we would recommend the following as a starting point:
- A proposal form with all questions completed and any additional information to support the answers also provided in an additional appendix.
- Supplementary construction questionnaire to provide information relating to cladding/fire safety, basement and swimming pool work.
- Survey and valuation questionnaire if applicable.
- Covid-19 questionnaire - a lot of insurers are now asking for information on how the insured has managed their business through the lockdown and what procedures have been put in place.
- Any additional risk management information on how the insured manages their risk, staff training, CPD, business continuity plans, etc.
Considerations to the price and cover going forward
In addition to premium increases driven by the hard market, insurers are also applying a number of other punitive amendments from renewal, including:
- Cover changing from an any one claim basis to aggregate.
- The policy excess being applicable to costs.
- Limits of indemnity being reduced as insurers are reducing their capacity.
If you do find that your cover has been amended from an any one claim to aggregate, it would be advantageous to request the aggregate limit comes with unlimited round-the-clock reinstatements. This acts as an alternative to any one claim cover with the difference being the way the claim(s) are allocated through the programme.
Changes to the RICS minimum terms
Historically, insureds who purchased PI as a mandatory requirement of their governing body, i.e. RICS, ICAEW, RIBA, etc., was relatively straightforward for insurers. If the insurer was an approved market for the governing body then they had to sign up to offer the minimum terms required by the governing body at the very least. In the softer market, the vast majority of approved insurers would offer cover in excess of the minimum terms in order to entice brokers to place business with them. This led to healthy competition and ultimately benefited the insured.
This all changed on 1st May this year with the changes to the RICS minimum terms. RICS had attempted to agree their own fire safety exclusion with all approved insurers, but this was rejected as the insurers wanted to apply their own respective exclusions to any terms quoted. The key changes to the RICS minimum terms are as follows:
- Insurers can now offer an aggregate limit with unlimited reinstatements instead of the current any one claim requirement.
- The excess can now be applicable to costs and expenses.
- Insurers can now apply their own fire safety exclusion.
At present, it is difficult to say how long the market will continue to harden, but the signs are that it will go on for the foreseeable future. Although the market will soften again at some point, in the meantime it is vital that insureds spend the appropriate time on their PI submission and continue to communicate with their broker throughout the process.
For an independent review of your PI cover please contact your Lockton advisor.