State of the Market for Professional Indemnity

The start of the hard market

Following the Grenfell Tower tragedy in summer 2017, the market was forced to reassess its exposure to combustible cladding - not just the use of cladding in tower blocks but also its use in the construction industry as a whole. Additionally, broader construction industry trends have also resulted in losses for insurers which have in turn contributed to harder conditions; tighter margins for contractors on account of a difficult economic cycle have meant cost cutting in supply chains (and liability caps), a more litigious environment, more onerous contract terms and conditions (such as fixed price contracts, fitness for purpose obligations etc.), and more widespread insolvency, which can have a domino effect.

These losses have coincided with greater insurer scrutiny as a whole on the profitability of specialist classes in the London market and widespread insurance market natural catastrophe losses from 2017, particularly those losses from hurricanes in the Gulf of Mexico and forest fires in California.

All of this has created a volatile insurance market whereby:

• Rating and retentions are increasing;
• Excess insurers are no longer following the terms set by the underlying insurers;
• Many insurers are reducing capacity; Gallagher has seen at least six insurers recently withdraw from PI, with a further two markets restricting their geographical exposure;
• The need for better underwriting data from clients, irrespective of loss experience;
• Renewing programmes require restructuring to secure the capacity required.

In addition, since PI is a long-tail class of business, it is common to see complex claims being resolved up to five or six years after the inception of the policy which, together with the ‘claims made’ basis of the coverage, means that those losses remain on the insured’s experience through many renewals, with any reserve increases over time likely to cause underwriter confidence to wain further.

What does this mean for renewals?

As a result, professionals within the construction industry are now likely to observe the reality of a hard market; rate rises upon renewal, restrictions on coverage, additional exclusions, and potentially challenging claims experiences. Many insurers are undoubtedly being more selective of the risks that they are choosing to write, preferring to decline a risk entirely if it falls outside of their underwriting appetite, as opposed to writing risks to maintain a portion of market share.

Top tips

Those businesses that are renewing their programmes during 2019 will need to work closely with their insurance brokers, and take some proactive, practical steps to prepare for these new market conditions.

• Start the renewal process early: Our key piece of advice is to engage with your broker early. In a hardening market insurers may refer risks ‘up the chain’ to senior underwriters, or above, as they become more selective or as they try to manage underwriting directives from their boards. Gather your information in plenty of time, and expect insurers to ask more questions than usual.
• Consider different insurers: As insurers become more selective, it may not be possible to use the same insurers that previously provided cover. An underwriter may not be able to provide the expiring level of capacity for a specific layer in the programme. Your broker will be able to advise you on the most suitable, alternative choices of insurers and, crucially, will ensure that the selection is aligned to your requirements.
• Select the right limits: It might be tempting to reduce limits of liability when market conditions harden. Ensure that your policy renewal has the appropriate limit selected and, if aggregate limits are being enforced by underwriters rather than on an ‘any one claim’ basis, where possible, request automatic reinstatements of the aggregate limit.
• Maintain a PI policy after project completion: Since policies are written on a ‘claims made’ basis, it is important that PI coverage is in place at the time that the claim is made – the claim would not be made against the policy you may have had in place when the error or mistake was made. Despite the challenge of rising rates, it is vital a policy is maintained to provide sufficient protection.
• Manage your supply chain: Where possible, implement ‘back to back’ contracts which pass risk down through the supply chain. Commercial reality may make this a challenge, in which case, utilising a smaller group of reliable sub-contractors where you have a close working history, is the next best option. Remember to notify any losses or circumstances that could give rise to a claim as soon as possible, to prevent the risk of an insurer declining a claim, or invalidating the policy on the lines of non-disclosure.