We have seen throughout 2019 a significant hardening on the Professional Indemnity Insurance Market. This has been caused by many years of reducing rates, increased severity of losses resulting in most insurers losing money in this class. Additionally, there has been an enhanced focus by regulators forcing insurers to take action to return this class to profitability. This has resulted in challenging renewals for buyers who have seen contractions in capacity, significantly increased pricing and in some instances a restriction of policy terms and conditions.
While current market conditions will result in challenges for all clients, and some impact is unavoidable, there are methods that clients should take to deal with and mitigate the challenges faced.
The most obvious mitigating factor is to give your brokers time as it is more difficult for your broker to secure optimum terms and to put programmes together. The more time you give your broker, the easier it will be for them to source alternate options if required. Start the renewal process as early as you can.
In the current market conditions, capacity is restricted, and insurers become more discerning about the risks that they insure. As such, an insured should look to differentiate themselves from their peers. Firms should look to work with their broker to develop a proposal form that enables them to do that, with a focus on risk management initiatives and detailed information on claims firms have experienced and the mitigation efforts introduced. Firms should also devote time to meeting with their insurers - firms that take this approach and invest in the relationship with insurers are unquestionably treated more favourably.
Firms that have shown loyalty to their incumbent insurers can also be dealt with more favourably than those with a history of moving around. While historic placement decisions cannot be changed, it is worth bearing in mind in the current environment and we recommend you work with your incumbent insurers where possible.
Innovation is important in a challenging market and clients should work with brokers that have innovative strategies. Aon’s Client Treaty, which offers up to $90mln in exclusive full follow form capacity that other brokers are unable to access, is one such innovation. This can be used to replace lost capacity or capacity that insists on higher pricing or more restrictive terms and conditions. Our clients have enjoyed significant savings and managed to maintain capacity as a result of this innovative approach.
There are also innovative placement strategies that can be explored to mitigate price increase. In normal market conditions most policies are placed on a horizontal basis where lead pricing is sought and then support to those lead prices is pursued. In the current market we are finding that follow insurers are not automatically supporting the lead pricing and, in those circumstances, a vertical basis may be more price advantageous. In this scenario, each insurer prices for their own participation on a layer and the ultimate price is calculated as a sum of the differing prices. Clients need to understand the possible ramifications of this approach and while there can be price reductions in year one, it can create claims challenges by introducing additional agreement parties and it can also result in higher pricing in subsequent years as insurers react to the perception that they have received a lower premium than other participants. Other innovative placing approaches include patchwork placements, where insurers not only price their own participations but also their own layers or attachment. The broker’s role is to ensure that there are no gaps in coverage in these complicated approaches.
Firms should consider whether retaining more risk themselves will reduce their total cost of risk, whether on balance sheet or via captive insurance arrangements. This can take a few forms, increasing the excess or retention is one way, but coinsurance can also be explored whereby the firm takes a share of the insurance themselves. This can generate significant savings in premium but there is, of course, an associated increase in a firm’s exposure. A broker can work with clients to help make these decisions whether by engaging actuaries to calculate the likely cost of retaining more risk, or captive consultants to see whether this approach is appropriate.
During the placement process, regular communication with your broker is paramount. Clients should be regularly updated on negotiations and the challenges that the brokers are facing in the market. Finance departments should have prior warning if pricing is increasing beyond expected levels, and firms should be conscious of any commitments made to their clients if they are not able to maintain their current limits of insurance.
The current market conditions are creating difficulties for all clients. The best prepared clients willing to devote time to the insurance market and with an open mind to different placement strategies, are those best able to mitigate these challenges.
Andrew Roast | Executive Director
Commercial Risk Solutions, Global Broking Centre, Financial & Professional
Aon
The Aon Centre | The Leadenhall Building | 122 Leadenhall Street | London | EC3V 4AN
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