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Blog: Professional indemnity - Was 2020 the eye of the storm?


MGB’s Nick Bender considers the evolution of the PI market and predicts how the space will look in future.

The UK PII Insurance Market is now unrecognisable from the beginning of the previous decade, which experienced heady rate-cutting and considerable over-capacity. Since 2018 we have seen mass exiting of Insurers, as return on capital had been almost non-existent.

Some of the issues that caused contraction in 2019 included 2017s Grenfell Fire tragedy and the student accommodation fire in Autumn 2019, leading to a combustible materials exclusion for the construction sector.

Continued Brexit uncertainty affected the property markets and the Financial Ombudsman Service compensation limit was surprisingly increased to £350,000, which meant a contraction in IFA space, which, in turn, encouraged long-standing Insurers to quit the sector.

Additionally, HMRC bore down on accountancy firms’ aggressive tax avoidance schemes. For years it was thought that accountants were immune to negligence actions – however, the retrospective legislation and very broad nature of the ICAEW PII policy wording caught out many advisers who had been counselling creative avoidance schemes.

Specialist PII Brokers worked hard to secure best pricing and coverage for policyholders, outperforming the less experienced brokers, who had previously enjoyed surfing over-capacity, (and would find it far tougher to continue their model of pack it high and sell it cheap). General insurance brokers, were now required to access specialist wholesale brokers to gain access to a much smaller market place.

As we moved into 2020 some thought that market rates would ease, while others forecast a mild softening later in the year, or more likely, 2021. As Q1 ended, underwriting rates were sharply up again, but then the Covid -19 pandemic arrived…

Underwriters were forced to WFH (work from home) and brokers found it difficult to contact underwriters and use traditional broking skills in negotiations. Insurers found themselves in the perfect storm.

The marketplace had changed overnight. Although co-insurance fast-tracked matters, Brokers faced the enormous task of completing large programmes with co-insurance placements, whilst still experiencing the restrictive nature of WFH.

One of the professions worst hit by the Pandemic are general insurance brokers. The market has hardened since Lockdown 1. At the start of the outbreak, it was unclear if general brokers would be hard hit by allegations of negligence for rejected business interruption claims, but there is far more clarity following the recent Supreme Court judgment in the FCA’s business interruption insurance test case.

 The judgment substantially upheld the FCA’s and the Hiscox Action Group’s case and dismissed insurers’ appeals. The finding that the vast majority of policyholders of non-property damage BI cover will indeed have cover for their business interruption losses, caused by the national response of Government to Covid-19, is welcome news for policyholders, brokers and their PI insurers.

We entered 2021 with some new capacity, but certain professions may have to wait some time before underwriting rates fall. Interestingly, underwriting rates now are probably not much higher than they were a decade ago.

Many Insurers have already reaffirmed their wish to remain WFH and this is expected to continue until nearly everyone has been vaccinated, such is the danger of the mutated virus variant which came to light late last year.

It is expected that underwriting rates may rise again but it is highly likely that policy coverage will be prisoner rather than pricing.

Market cycles change, and whilst it would be brave to suggest that this will happen in 2021, it may very well happen at pace next year, as return on capital will have hopefully swung into positive territory.

The UK PII Market is not a cartel, it is a free market in which insurers compete daily with each other. There is still competition for good business, so I expect to see far more competition this year, than last year.

Nick Bender is managing director of MGB Insurance Brokers

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