Although there are signs of improvement, the professional indemnity market remains challenging. Mike Pearson, head of PI, London and Alison Goodwin, Public Sector Practice Leader at Aon, explore the challenges facing the market and the implications for public sector organisations.
It’s been a tough few years for professional indemnity insurance (PI), with issues around risk appetite leading to a hard market. While there are signs it’s starting to calm down a little, it remains a challenging market.
The issues started back in 2018 when a Lloyd’s Performance Management Directive found that non-US PI was the second worst performing class of business and one of the main drivers of its underperformance.
This sent the market into a frenzy, with insurers limiting their risk appetite; pushing through rate increases and higher excesses and, in some instances, adding exclusions and changing the basis of cover.
Construction is one of the sectors to be particularly badly affected. After Grenfell, accessing affordable cover was a struggle, especially for anyone involved with cladding or fire safety. The reaction to the Lloyd’s report exacerbated this.
And these difficulties continue. Last year, the construction sector saw an average increase of 46% in PI premiums, with some risks seeing their rate doubling, trebling and more.
Given these issues, it’s essential that public sector organisations understand their exposure and take the necessary steps to minimise risk. This is particularly the case where contractors are involved, especially when they are in sectors such as construction where access to PI is more challenging.
For these risks, it’s important to check the basis of cover. While PI was often written on an ‘any one claim’ cover basis, insurer caution means it’s now much more likely to be on an ‘in the aggregate’ basis.
This is considerably less generous. Say a policy has a £10m limit. With an ‘any one claim’ policy, the insurer could pay out £10m a day. But, if it’s written on an ‘in the aggregate’ basis, that £10m limit applies to the full year. Once it’s used up, some policies will allow the insured to reinstate cover but this isn’t always an option.
This shift is problematic for contracting organisations as it offers them much less protection. Asking contractors to take out larger limits is one option but as these may not be available, it’s prudent to assess the risk. Taking into account factors such as the size of the contractor and the number of other organisations it might be working with, can give an indication of whether cover might be available if a claim arises.
Although contractors’ PI is the key issue for public sector organisations, some can also find they need cover themselves too. Although any issues relating to statutory duties fall under the Officials Indemnity cover, the growth of traded services means a public sector organisation can need its own PI cover.
For example, where a local authority has excess capacity in its legal team, it may sell its services to another authority. As this isn’t a statutory duty, it creates a PI risk. Universities can also have a PI exposure when working on research projects with commercial organisations.
Insurance may not be a primary consideration when arranging these services or taking on a new research project. This means it’s important for risk managers to understand what the organisation is doing in this space. Reminding other departments to keep them informed of any new ventures will ensure appropriate cover can be put in place when it’s needed.
With insurers taking a more cautious approach to underwriting PI, it’s important to allow plenty of time when arranging cover. Poor underwriting practices have been improved and underwriters are now taking a more in-depth look at every risk, often with triage and peer review to ensure the rate and terms are accurate.
Insurers also expect to see more in-depth data to support their underwriting decisions. Even though some insurers won’t quote until 30 days before renewal, this means it’s prudent to allow more time to arrange cover.
Starting as early as possible and providing the information requested quickly is essential. Insurers can be choosy and the presentation will play a major part in determining the rate and terms they offer.
Striking a balance between cover and risk is essential in the challenging PI market. To discuss any of the issues raised in this article, speak to your Aon account manager or contact Alison Goodwin at firstname.lastname@example.org