What’s going on in the UK Construction Professional Indemnity (PI) Market?
Posted on 2nd May 2021 at 11:29
The UK PI insurance market for Construction Professionals is precarious and things do not look like improving anytime soon. In this blog, we look at how we got here, the impact it is having and what you can do to best navigate these turbulent waters.
To provide some background, it is useful to understand market cycles and what drives them.
Rates are dictated by the availability of capital and competition, the more readily available capital in the market, the greater the competition which drives rates down. This is known as ‘soft’ market conditions. The tipping point is when an insurers ‘Combined Operating Ratio’ (COR) exceeds 100% (this is when the insurers combined cost of claims paid and their incurred expenses is greater than premiums received), it is losing money and it reacts by increasing rates or withdrawing, known as a ‘hard market’. For more information on this, please see our Insurance market update – April 2021 post.
What Caused things to Deteriorate?
Professional Indemnity Insurance in the UK has been unprofitable and for a number of years now. The Lloyds ‘Decile 10’ review in 2018 unveiled that non-US written PI business was the second-worst performing class of business in the market, with 62% of syndicates reporting aggregated losses in the preceding six-year period. What followed was the mass exodus of insurers with capacity estimating to half in the proceeding 18 months to May 2020.
The Grenfell Tower disaster in June 2017 was the catalyst for the ‘Cladding Crisis’, increasing both frequency’ and ‘severity’ of claims relating to Aluminium Composite Materials (ACM) and High Pressure Laminated panels (HPL). This prompted an urgent review by the government of the building safety system which led to the introduction of the Building Safety Bill which later required the Government to step in and provide a state backed insurance scheme for professionals signing off EWS1 forms. This intervention was required to unblock the bottle necking on the sale of any flats in High Rise Buildings (exceeding 18m) subject to External Wall Safety (EWS) under 'the Bill'.
The Impact on Policyholders
Rate increases – required by insurers in order to return to profitability.
Competition reduces – if an insurer does not think it can carry rate increases, then it is forced to withdraw from the market.
Appetite contracts – insurers focus on profitable areas, have less flexibility and greater emphasis on risk selection.
Covers reduce – higher insured retentions (excesses), more exclusions and sub-limits with a preference for ‘Aggregated’ limits to cap liability.
Greater risk scrutiny – underwriters want to see more detail surrounding the insured’s risk management to provide comfort they have a good attitude towards risk, aware of the pitfalls and proactively manage.
Service levels drop - insurer response times slow down as workloads build up and higher number of risks are referred internally up the chain of command for sign off.
Line sharing increases – more common place for brokers to require multiple insurers to fill an order, known as a ‘slip’ in the Lloyds market. This creates greater work-loads and a higher risk of not filling.
What can you be doing?
Work with an experienced broker that takes the time to understand your business, the risks you face and provides you with options so you can make educated decisions based on the facts.
Detailed risk presentations are essential, especially when it comes to your risk management and how effectively you manage it. Do NOT confuse this with data dumping, which has a negative effect.
Allow greater lead times whe sourcing insurance or prior to renewal.
Review your risk management to ensure you have robust systems and processes in place to mitigate the risk of loss.
Where you engage the services of specialist sub-contractors, ensure the terms of any sub-contracts mirror that of your primary contract
Checking any sub-contractors’ insurances (where applicable) and their financial solvency on periodic basis, especially on projects that run for numerous years.
Capping your contractual liability including any consequential losses at a reasonable amount and not exceeding your limit of indemnity.
Tight letters of engagement that clearly set out the services provided and timeframes to manage expectations.
Encourage milestone meetings with your employer to manage any project delays.
Experts in the field
At Johnson Insurance Services, we take the time to understand our clients business in detail, the risks they face and what matters most to them, so they can confidently leave what we do best and so they can focus on the job in hand.
For more information or if you have any queries how we might help you, please contact one of the team on 01904 217455 or drop us an email firstname.lastname@example.org
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