Combined with the continual decline of premiums and the relaxation of policy terms and conditions over the last ten years, the Covid-19 global pandemic has struck the insurance market at a time when remediation across most lines of insurance was already well underway.
Recently, we have been experiencing significantly lower interest rate levels across most major markets, which acts as a crucial driver of this hard insurance market, particularly in the wake of Covid-19.
With dramatically reduced capacity in the key lines of the insurance market, commentators find themselves seeking precedent and fall upon historical hard markets to draw comparisons to the current conditions. The uncertain conditions we now find ourselves in are similar to what we might see in the periods following natural and man-made disasters. While Covid-19 is one particular factor of today's hard market, environmental events no doubt continue to play a part.
For UK architects and engineers, 2020 was a standout year. In the midst of coping with extraordinary challenges brought on by Covid-19, firms also had to prepare for the professional indemnity insurance renewal. At the end of 2019, the professional indemnity market was hardening quickly, with Covid-19 compounding and restricting the market, creating a volatile and fluid trading environment.
Yet, while Covid-19 has added to the uncertainty of the professional indemnity market, losses are yet to be realized. This differs from other lines of cover such as those tied to entertainment, commercial property, business interruption and accident and health products such as travel insurance.
“The pandemic struck after eight or more years of recessionary impacts in the construction PI market, the results of a period in which underbidding for contracts, taking on contracts that were too onerous or outside areas of expertise and a reduction in the quality of work became more commonplace in some parts of the construction industry. Given the compounding pressures of the pandemic and Brexit, it is important that bidding discipline is maintained and the lessons we have all learnt from the last decade do not go forgotten so we can look to a more stable future. The current uncertainty makes it all the more important that we work closely with construction clients to understand their risks and build solutions that are fit for purpose across the economic and insurance market cycles..” Andy James Underwriter – A&E and Construction Beazley
The last 12 months, for many architects & engineers, have been particularly challenging from an insurance perspective with the global pandemic only adding to woes.
Shared experiences for architects and engineers at renewal over the last 12 months
Rating increases of up to 50% for primary, with excess layers following suit. Excess layer pricing tends to follow basic ILFs (Individual Limiting Factors) and therefore generally mimics any primary layer increases. However, over the last year there have been rate increases across the market of 100% plus, where insurers have felt that corrections are required – a trend especially relevant to contractors. This is normally driven by claims activity and sectors of operation, which is then fueled by a reduction in capacity.
Reduction in capacity due to insurers exiting certain classes of business, reducing line sizes, or no longer being willing to participate on consecutive layers of cover on multi-layered insurance programmes. This makes the completion of an insurance programme more challenging, especially when the market is already at reduced capacity.
Since 2018, market capacity has been trimmed significantly; where a market once provided £5m of capacity, this has reduced to £2.5m. In fact, over the last year, no more than £5m of capacity was deployed over a single programme of insurance. Where capacity was lost, any new capacity was often offered at an increased price and/or with more restrictive cover driving premium increases.
Change of limit from 'any one claim' to 'aggregate plus unlimited reinstatements' or single aggregate. Where aggregate plus unlimited reinstatement limits are offered, a condition to the total limit purchased would have likely been made (at least £20m in most cases) as insurers endeavored to build in relief from claims frequency.
Policy coverage has changed significantly. With continued uncertainty in respect of cladding systems and fire safety of buildings, cover was being further restricted to an aggregate limit. This did not include cover for consequential losses, only rectification costs. It was not uncommon to see markets further applying sub-limits to this cover and for any new capacity required, which meant outright exclusions becoming more widespread.
There was also the introduction of EWS 1 exclusions, communicable disease exclusions and transit exclusions.
Higher self-insured excess, which did not necessarily mitigate the increased cost of capacity through the rest of the insurance programme.
For the majority of our clients, the last two PII renewals have been a more complicated renewal cycle which, consequently, have taken longer to complete. This was because insurers needed to carry out a more forensic analysis than in previous years and conduct additional internal sign-offs – a trend we expect to continue.