Market Watch - Professional indemnity: Cover-all expertise

A single renewal date for solicitors' professional indemnity, 1 October, presents many challenges, among them market uncertainty and condensed lead time. David Harries, head of professional and financial lines at QBE, points out that time is of the essence for brokers and their legal clients. He says: "Some insurers take the view they will write a [certain] amount and, once they've satisfied it, they will stop."

Harries accepts that, in such a dynamic market and with the full impact of the withdrawal of Quinn yet to be felt, predicting how premiums will alter in the run-up to the deadline is difficult. He suggests: "I don't think rates will be softening because there are more claims; what we have seen is greater stability in rates."

Many of the claims have come from the assigned risk pool. Harries notes: "ARP claims in the last two years have gone skyrocketing through the roof; they've reached £60m and could go beyond."

It is an area that is being addressed. One major change is the reducing solicitors' capability to secure insurance through the ARP from two years to one. Harries is still not a fan and believes that more insurers could write business if there were no ARP. It is not the only factor he dislikes: "The SRA and Law Society have a one-size-fits-all insurance requirement: it's like underwriting with one arm behind your back."

Harries believes that explaining the individual attributes of a client and the legal audience they are targeting is key: "Brokers have to do health research to find out what types of firm, by size or fee, insurers are writing and what the pricing is. For well-run and reasonably sized firms, there'll be a lot of capacity but, for some segments, usually at the smaller end, there will be paucity."

Surveyors
Another profession facing challenges in securing professional indemnity is chartered surveyors. Emma Vigus, head of new business at Howden Professional Risks, points out that firms conducting valuations for lending or accounting purposes face a hard market because claims and notifications have risen, the majority related to valuation of residential properties. In other sectors, such as building or quantity surveying, she says the market is soft.

Although there is no one date for renewal, Vigus recommends early preparation, saying that the broker prefers to begin the process at least six weeks before renewal if not three to four months out. She admits, however, that it is not unknown for new firms to approach them the week before renewal.

A further comparable feature has been steep rises in claims but, again, they have been sector-specific, for instance residential one and two-bedroom apartments in certain parts of the country. For Vigus, this means the broker needs to not only understand their client but also educate them about the insurers to approach. She says: "It is not just about selling product, it is about advising on best prices by best fit. Help them understand the views of the insurers: how to present risk, risk management and steps they are taking to mitigate those risks."

Looking forwards, Vigus believes there is uncertainty as with the solicitors' market. In commercial property, valuations are much higher and while, Vigus feels that the market has not seen the volume of claims anticipated 18 months ago, any increase would have an impact. Concerning residential, she adds: "There are a batch of lenders, sub-prime in particular, who are yet to review their valuations: we don't know if they will and what the effect will be."

Neil Pointon, chief executive of PI specialist broker PYV, highlights independent financial advisers as another sector that has avoided the worst excesses predicted at the depths of the recession. With a falling stock market, it was thought that dramatically lower investment values could, rightly or wrongly, give concern to clients and lead to claims. He says: "Such areas were expected to lead to a large number of claims. There have been some but not many."

Pointon notes that the current state of the PI market is "surprisingly good" after the economic turmoil of recent years but cautions brokers to be aware that nothing beats knowing their clients inside out. He explains: "If people had specific problems with regulatory visits and had been asked to review the way their business operates, there's a chance they might struggle to find cover at the levels they've previously enjoyed."

Careful research
With capacity available and one or two new entrants keeping premiums low, he advises a balancing act between looking to maintain relationships and seeking lower premiums: "There's always an argument for insurer continuity if at all possible. Brokers should make clients aware of that but should seek out alternative terms to see where the market is."

Pointon also sees similarities with the PI market for general insurance brokers: "I would argue that it is similar to the IFA market; general insurance brokers have enjoyed benign conditions unless they have specific issues."

PI, though, goes beyond which market is or is not hardening and why. It is also a vibrant area for innovation and new products as the industry looks to react to societal changes in economic demand.

One insurer to develop a new offering is Zurich, which in April launched a telecommunications and technology product covering PI risks including privacy, network security and IT liability for customers within the technology sector.

Geoff White, senior underwriting consultant at Zurich, explains it is a developing area where the insurer sees lots of potential. He says: "Technology moves on daily. If you look at what is happening in the UK, it's an area that's going to grow with lots of spin-offs from the likes of universities."

Zurich's product can be bought as a standalone or as part of a package and is designed for clients with turnover of up to £300m. The insurer aims to grow sales to £7.5m within three years and White knows a lot of the growth could come at the smaller end of the spectrum. He claims it is an area in which brokers could see increased demand and that they need to react in order to win business or retain clients. He says: "There are a lot of bright people out there and this product could go down [in size] to a start-up, even someone thinking about appearing on the Dragons' Den who is working from home."

Groupama has also been busy extending its offerings. Malcolm Smith, commercial lines director at the insurer, says it addresses a gap in the market for PI for small and medium-sized enterprises: "Most brokers are getting some PI enquiries from miscellaneous trades on a weekly basis, from people involved in professions such as IT and contracting trades like electricians and plumbers."

Smith believes it is already a revenue opportunity that brokers are keen to exploit, with clients facing changing insurance requirements. He says: "Local authorities and larger corporations are increasingly asking for evidence of PI cover along with public liability when tendering for work. The PI risk might be modest but they still have to buy the cover."

Market potential
Smith adds that, with the recession motivating people to choose self-employment or to found a small business, it is an area in which brokers could see a progressive increase. The insurer's Optima Professional Indemnity addresses the new areas by offering online cover to 300 trades and professions with indemnity limits from £50,000 to £5m. Smith points out that a £500 minimum premium is common for mainstream PI providers but, through their product, brokers can write business online for smaller amounts for companies with up to 20 employees.

He also highlights the importance of saving clients time, specifically concerning documents and cover being available instantly. He adds: "Our aspiration is to achieve wide distribution and we will look at offering it on software houses in the longer term within the next 12 months for back-office compatibility."

With a range of opportunities and growing potential threats, it is an area in which brokers will be busy for many years to come.

Advice from Biba
Graeme Trudgill, technical corporate affairs executive at the British Insurance Brokers' Association, warns brokers on the importance of considering professional indemnity cover for themselves carefully. "There is no doubt that the PI Market for brokers is good for buyers. Our panel of accredited PI brokers tells us that premiums are at rock bottom, with a lot of capacity in the market at the moment. Insurers are happy to take on brokers and rates can even be as low as half of what they were three years ago with no signs of hardening.

"The minimum levels for small firms set out in the Insurance Mediation Directive are €1,120,200 for a single claim and €1,680,300 in aggregate. We say that brokers should think carefully about their precise needs and speak to a specialist; everyone is different and you should by no means think you are safe if you buy the bare minimum.

"While rates are low, the recession has highlighted the crucial important of good PI cover. At Biba, we have seen cases of claims where a client, keen to restrict their insurance spend, has not wanted to increase sums insured despite their broker's advice. They have been upset with the consequences after their building burnt down. Brokers should document their advice and, while it can sometimes be the challenging thing to do, they should also look to have written responses from their client. This should confirm that they have understood the consequences of not following your advice, particularly in regard to underinsurance. If you have nothing in writing, you could potentially come unstuck."

Source: Professional Broking – September 2010