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Consulting Matters Protecting your business
Professional Indemnity Insurance – Market Update Just like all industries, 2020 has forced transformation in the Insurance world. Although it now seems like a haze, there have been some changes in the Insurance industry that are worthy of a mention. Over the course of 2020 we saw significant contraction in cover provided by insurers to construction and design consultants, particularly around cladding exposures, loss mitigation costs, costs estimate and cross liabilities. This resulted in a significant market retraction with several insurers either exiting or ceasing to write new business and the remaining insurers imposing, in some cases, significant increases in rates. Design and Building Practitioners Act 2020 (NSW) Insurers are also concerned about the changes to the duty of care provisions under the Design and Building Practitioners Act 2020 (NSW) which came into effect in June 2020. The new registration and certification scheme that comes into effect mid 2021 may also impose additional insurance requirements. However, it is too soon to determine how these changes in legislation will affect consumers. Covid19 Amongst the multitude of problems brought on by a global pandemic, one of them is obviously a significant degree of uncertainty in respect to what the future global economy will look like. In the past, we have typically found that where uncertainty exists, insurers tend to price for the worst-case scenario or just withdraw capacity altogether. As such we must educate the insurers and, in particular, the re-insurers of the new risks that each profession faces and, more importantly, the risk controls that each respective profession/insured has put in place to minimise their exposure. In our experience, past recessions have seen increases in claims against professions such as property valuers, real estate agents, financial planners, accountants, mortgage brokers and construction professionals. In other words, claims tend to increase as losses are crystallised in a recessionary market – this is particularly concerning as many Insurers are only just finalising claims that arose from the global financial crisis (GFC) of 2007-2008
State of the Professional Indemnity (PI) Market: • During 2020, insurers continued to increase PI premiums reflecting the ‘hardening’ market’, • In the main, PI rates are on the rise and the rate of increase can range significantly depending on the profession, • Insurers are restricting cover and are looking for significant increases in both premium and self-insured retentions (i.e., excesses or deductibles), • Insureds with paid claims and/or open notifications continue to experience the greatest impact, • Increased focus by PI Insurers on Insureds with ‘Combustible Cladding’ exposure, • After Marine insurance, Professional Indemnity represents the second most exposed class of insurance for Lloyds of London and is now an exposure that Lloyds are actively seeking to lessen. This has contributed significantly to the previously mentioned reduction of PI capacity in the Australian Market, • Insurers are experiencing a higher frequency and severity of PI claims than ever before, • Insurers and reinsurers are reviewing risks more stringently and their response times are much slower than in previous years. The Trends in the Market - 2021 and Beyond • Continuing claim activity around construction professionals exposed to Cladding/Non-Compliant Products • Historically PI claims tend to increase following economic turmoil and although, the Australian economy seems solid, much of the insurance market is very much driven by global factors, • Heightened concerns regarding the PI risks of all building professionals and in particular, Building Certifiers/Surveyors, Project Managers, and certain disciplines of Engineering (e.g., Fire, Structural, GeoTechnical etc), • Increased concerns in respect to possible PI issues raised by Covid19 related issues and from the recent Royal Commissions into Banking, Aged Care etc, • Continued tendency amongst PI insurers to restrict policy coverage, mainly through the imposition of additional exclusions or tighter policy wordings,
•T he reduction of PI capacity in the Australian Market has meant the need for brokers to build multi-indemnity layer programs, meaning that Insurers may need to refer your risk to Re-insurers based overseas for review, and this all takes additional time and adds to the complexity of the program. What can you do? Some strategies to keep in mind to help with your insurance renewal include: •R eturn your proposal form early. This will allow your Planned Cover Broker time to review and send to insurers for discussion. Insurers may need to refer your risk to Senior Underwriters or possibly Re-insurers based overseas for review, and this all takes additional time. •B e prepared to put in more thought and time in completing your submission and, depending on the size of your business, we suggest putting some work into developing a risk management program that we can include with your completed proposal form as part of your PI renewal submission. •F or any Insureds that have had the misfortune of being involved in a claim or two, a risk management program with specific emphasis on what you have learned from the claim, can also prove highly beneficial in assisting us to secure favourable terms on your behalf. •S peak to your Planned Cover Broker regarding any concerns or changes in your practice. In order for the PI market to stabilise, Insurers will need to see value coming into the market so they can underwrite the risks profitably. There is a belief that the hard market will continue for another 18-24 months and Professional Indemnity premium rates are expected to increase by an additional 10-20%, but much greater increases are expected for more complex &/or highly exposed risks or those with substantial claims history. Karen Meiklejohn Cos Cirocco Planned Cover
