Coming of age

Does anyone remember the hard market? It seems an age gone by but in fact it is not so long since a drought of capacity after years of underwriting losses seemed to be driving rates in the professional indemnity market ever upward. Yet now all are agreed we are in a soft market, with a glut of capacity and frantic competition driving the price of cover down.

It is conventional wisdom that, in this highly cyclical industry, rates will surely come back up again as capacity gets driven back out of the market by poor underwriting results and tighter returns on investment. However, what if something fundamental has changed?

The phenomenon called the soft market is not only just another swing of the business cycle. There is something deeper going on - the de-specialisation of professional indemnity.

Underlying patterns

In the past there were just a handful of underwriters in the PI market - with Norwich Union, Royal and SunAlliance, Hiscox, London and Edinburgh and Lloyd's springing to mind as the obvious dominant players. However, then the individuals in these old specialist teams grew up, leaving us with far more PI underwriters than before, people who were living and breathing PI.

The same process has taken place in broking. Not so long ago, the PI market was dominated by the wholesale specialists - Nelson Hurst, Marsh, CE Heath and First City - now everyone is involved.

So, whether we are looking at underwriting or broking, the same underlying pattern emerges. It is unmistakably a maturing of the PI market. And if this is right, then we may not see the sort of cyclical hardening of the market that we have seen in the past.

Today we see a huge number of new providers. Major overseas insurers such as St Paul Travelers, AIG and Zurich are involved, and domestic insurers including NU and RSA are still fighting on. Insureds are aware of the scale of competition and have the benefit of cheaper prices as a result. The big insurers are still making money - many because of past underwriting in the hard market - and there is no lack of appetite. When Hiscox all but pulled out of the solicitors' PI market last year, competitors snapped up their book and it made almost no difference whatsoever to market dynamics.

New entrants in the last few years include Quinn, WR Berkeley, Catlin and Novae, and new brokers active in the market include Prime Professions and Lockton, who acquired the UK PI business of Alexander Forbes. Not to mention the vast number of general commercial brokers who now place PI business themselves rather than relying on a wholesale specialist.

This growth of participation and de-specialisation will continue to offset the market cycle for the time being. What will have an eventual impact is when claims results catch up. And that will depend not on the insurance industry's own cycles but on the big picture - the fate of the rest of the economy.

The frequency and severity of claims in the professional services sector is influenced primarily by the macro-economic background. The economic condition of UK plc is paramount. In an upturn of economic activity there will of course be more underlying events capable of giving rise to a claim - fraud and recklessness are driven by greed - but at the same time there is less motive to claim. It is when the economy slows down and margins tighten that the claims will start to mushroom.

Survival of the fittest

Fraud is surely one of the major clouds on the horizon. Other emerging claims issues include the rise of compliance for professionals and the end of self-regulation. While this should ultimately improve performance, professionals are going to have to work hard to ensure not only that they comply with a raft of new obligations but also to show that they are doing so.

As far as distribution is concerned, the picture is also changing. Here it is not so much a question of survival of the fattest as survival of the fittest. Insurers and intermediaries are both seeking to minimise their distribution costs.

As a consequence, brokers determined to build and maintain a successful PI book will be taking a smart view of the market. They will be aware of the good news that makes PI so attractive - lots of insurers, lots of capacity, a growing market, an economy still in upswing and significant cross-selling opportunities to clients who are often high net worth individuals in their own right.

There is a real need for caution too, however. Brokers getting involved in PI will find a market in which competition is very sharp, with complex cover, technically difficult claims, important legal changes and very demanding clients. It is long tail business that needs to be written and managed with care, and it is sensitive to major economic changes which may not be as far away as we prefer to think. Brokers will be seeking an insurer who will give them a great deal more than just a price.

- Jonathan Davies, Assistant general manager, professional risks, St Paul Travelers Insurance Company.