Part 1 - The state of the current financial lines insurance market for Professional Services firms
Andrew started the discussion by stating that non-US (aka “International”) Professional Service Firms had generally seen rate and some premium reductions over the last couple of years across all Financial Lines Products. He asked the panellists to comment. Our panellists observed that there is an increase in local insurance market capacity (outside of the London market, in other countries such as Canada and Australia) which is offering insureds more choice, but that this also means less premium coming into the London market and more competition for the existing business. The market cycle is currently soft for financial lines and this is projected to continue due to this increased competition. Looking back over pricing for the past 5 years, the panellists cited some statistics showing that the rate increases we experienced during the 2017-2022 period have largely been rolled back to pre-hard market level. Part of the softening is as a result of the apparent reduction in claims during the COVID years, but underwriters expressed some concerns around future sustainability of current pricing as there has been an uptick in claim activity more recently; some of this may be due to delays during the Pandemic or it may be entirely unrelated.
The panel also considered the issue of how data will impact the market cycles. The panel observed that this may lead to shorter market cycles as changes in risk will become evident more quickly. Modelling will be more accurately predictive and ideally this should lead to less pricing volatility. More technically led pricing models should also lead to more bespoke terms for individual firms.
Our panellists noted that insurers have three levers at their disposal to manage their underwriting risk – Premium, Structure (e.g. attachment point, retention, capacity deployed) and Policy Terms. For Professional Services firms, policy terms are largely mandated by the industry regulators, at least for Professional Indemnity. This leaves the other two levers to pull. Insurers have used both quite a bit through the hard market and will continue to do so to manage through a softer market cycle.
Our panel considered the role of follow form insurance facilities, such as the Aon Client Treaty (ACT), and how they impact the market for Professional Services firms. The panel view was that they drive efficiency and they work well for broader spectrum risk transfer. They are follow form which benefits insureds – both on claims and terms.
Follow form insurance facilities will drive acquisition cost down which should benefit insureds. They also benefit participating insurers as they provide a spread of risk and data driven algorithms which does not require the same underwriting costs that individual insured underwriting carries. But the panel felt that what they are not suitable for, is leading programmes and as substitutes for the relationships built with individual firms. Those functions are still needed because they do the actual underwriting of risk – developing terms and responding to claims. But the rise of facilities may mean that the market moves in the direction of a smaller number of key leaders who invest in the infrastructure of underwriting and claims support, who are trusted by the rest of the market, while other insurers cease to invest in those services and simply support their lead. Our panellists observed that this may put pressure on smaller insurers which typically follow with modest capacity and could be another factor in prolonging the softening market as these Insurers look to offer premium reductions to stay on programmes.
Part 2 - The Underwriting Process
The panel explored how actuaries and their analysis form part of the underwriting process as well as the value they place on underwriting meetings. Actuaries model the future based upon historical patterns. From our panel’s perspective, actuarial models act as a guide to the underwriters. But while that guide gets to an average risk profile and premium, underwriters must use other factors to differentiate from that average. Those factors include a firm’s culture, risk management, and clients. The underwriting meetings are critical because they offer a chance for open dialogue across a range of subjects. The panel want to have deep conversations, ideally in person, with the right people – but those people do not need to be a set group – it should be the individuals who are close to the strategy of the firm and the management of risk.
The panel reflected on how things differ in the cyber market. The cyber market reacts more quickly than the other Financial Lines, due to the short tail of claims – typically three years from notification to final resolution rather than ten for PI. This means it can be more volatile in terms of premium and coverage. There is also a lack of historical data so actuarial modelling is less reliable. Underwriters have a concern around systemic aggregation of risk, although, as our panel noted, to date, systemic incidents have not shown a massive aggregation of cyber claims. Over time, more data may support this recent observation, which could help to stabilise pricing and cyber market cycles could then follow more similar patterns to those of more mature coverages such as PI and D&O.
Our panel considered how the approach varies regarding underwriting excess layer insurance policies. When it comes to excess layers in programmes, there are very few claims, so actuarial analysis has limited value. The nature of claims is also longer tail than primary, with reserves often being set five years or more after they are set in the primary layer. These layers are highly sensitive to loss as the premium levels are set at 1 in 50 or even 1 in 100 year loss expectations. More than one hit can wipe out premium for many years across the entire industry. This is an area where insurers need premium pools of a reasonable size to protect against the volatility risk.
The panel observed that underlying risk has shifted materially in PI (size and complexity of deals, expansion of services offered, and regulatory environment, for example) and insurers will not see this borne out in claims for many years. Insurers are looking back up to 15 years now, 5 years beyond the traditional 10, because they are seeing a change in the claims pattern with matters which have sat dormant or without a reserve, coming through. This may be due to courts having a backlog post-Pandemic, when litigation was stayed. The panellists have also seen some quite rapid settlements for very large sums.
Part 3 – Hot Topics for Underwriters in the Professional Services space
We asked our panel about their thoughts about the MegaTrends that Aon has observed – Weather, Trade, Workforce and Technology – and how the intersection of these trends is impacting Financial Lines underwriting and risk for the Professional Services sector. The causes of claims have remained stable over time in the panel’s view, e.g. engagement terms, conflicts of interest and supervision, but the environment is changing. Technology is the biggest shift – particularly Gen AI. How are firms using it, how are they mitigating the risk, what is their future strategy. Underwriter questions are not so much about concerns regarding firms using AI – in fact, the panel noted that firms that adopt AI quickly will likely have a material advantage over those which do not. But when they ask questions, underwriters are trying to understand a firm’s culture around risk. Our panellists identified risks around confidential client data as well as network/3rd party vulnerabilities. Underwriters want to see clear policies and response plans as well as an openness around incidents, controls, vendor DD, remote working and MFA. They recognise that higher risk is not attached to one type of firm or size of firm – there are reasons why large organisations are targets, such as their client base and deal importance and reasons why smaller firms are, such as the expectation that they have invested less in security measures and may be easy targets.
Claims are increasing in severity – this is something which our panellists clearly identified, particularly regarding PI claims. The panel noted £50m+ in reserves posted over the last three quarters across the book of International Professional Services firm claims. Claims inflation is a concern as is defence cost inflation. The firms themselves are getting larger and deal values are significant. M&A advice is a particular area of risk. Firms are more global, so the U.S. risk is a challenge. Regulatory scrutiny is impacting all professions and is across multiple geographies. The overall claim picture for PI is not benign, despite the soft market conditions and this is something on which are our panellists advised that insurers are keeping a close eye.
Part 4 – Future Outlook
We asked the panel to look ahead and share with us their thoughts about the biggest challenges and opportunities in terms of the insurance market for Professional Services firms. They told us that insurers want to create a market that is sustainable and while they do not see any imminent change in 2025, they do expect rate reductions to stabilise in 2026. For example, they need to consider whether the programme structures are fit for purpose when looking at severity levels and limits, for example. Insurer selection and long-term partnerships with insurers need to underpin the market for it to be sustainable. Geopolitical instability and recessions are concerns. Financial institution risk impacting professional services firm advisors is also an area insurers are watching.
Part 5 - Audience questions
Crypto – used to be a big topic, how do insurers feel about the topic now?
Crypto is here to stay and has become more regulated. It is not an uninsurable risk. Insurance is a risk transfer business. But be transparent and give clarity and consider whether the work is worth the risk before taking it on. This will assist everyone when and if there are claims – to ensure everyone understands the strategy and insurers are ready to pay claims.
What about holding client monies – how do insurers feel about this exposure?
It is not a new exposure and most firms are well set up to deal with it. PI insurers are in regular communication with the regulators, especially the SRA. They engage on areas of risk which they want to see the SRA address so that insurers can continue to offer the broad coverage required. If firms ceased to hold client monies, this would probably not have a material impact on premiums charged to large firms, but could do, for smaller firms as the fraud risk is a material exposure for them.
Which territories are a concern from a claims perspective?
U.S. obviously, but also EU tax work, especially in Germany where insurers see claims arising from work done many years ago, Canada, where the claims profile is increasingly difficult, especially in Quebec, Australia, where there is quite a bit of regulatory activity, LATAM where conflicting local regulations are driving some increased activity, Saudi Arabia where workforce rules are generating some claims activity, and China where insurers have observed inconsistent claims outcomes which can make claims handling more difficult.