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Recession, cyber threats and regulatory intervention are market’s top concern
Global law firm Clyde & Co’s Confidence in the face of challenge report reveals that confidence is high and appetite strong in the London professional indemnity (PI) market despite a trinity of challenges facing the industry. With 94% of insurers planning to write the same or more business in the next 12 months, recession, cyber threat from remote working and continued regulatory oversight are top of the insurance industry’s list of concerns.
Clyde & Co’s Global Professional Liability team surveyed 122 London market insurance professionals including broking, underwriting, claims as well as buyers for their take on developments in the PI market and buyers in May this year.
The main findings highlighted:
Simon Konsta, Partner, Clyde & Co comments: “These findings are both surprising and gratifying for the insurance market. That appetite is strong despite the challenges being faced should give the market a lot to think about as it confronts renewal season. Neither buyers nor carriers have any doubt that claims are set to rise, but there is broad agreement that London is well placed and has the appropriate capacity, competitive rates and robust claims functions to preserve its position as a preeminent international hub for PI risks.”
COVID on our agendas for a while
The industry acknowledges that there are three key areas where COVID-19 might change buyers’ risk profiles in the next five years, the heightened threat associated with weakened supervision being the most prominent. Increased privacy, cyber and ransomware exposures as a result of remote working comes in joint second together with the financing and insolvency consequences of the economic impact of the recession regarding maintenance of standards.
Claims outlook set to deteriorate
The claims environment has already started to shift. In the past 12 months, a quarter (24%) of buyers have seen more PI claims brought against their organisation, while 35% say the size of claims has increased. Over the next two years, 95% of insurers expect to see more PI claims and 67% expect them to be more severe. Over the same period, 41% of buyers expect more losses and a similar number expect the size of these losses to increase.
Market appetite remains
Despite the challenging market, appetite for writing PI business remains robust. With prices continuing to harden after an extended soft market, underwriters are sensing an opportunity to write more restrictive cover for higher rates. Renewals, however, do represent a challenge. Many brokers are still working hard to complete placements that in previous years would have been straightforward. Likewise, only 52% of insurers anticipate that buyers will be able to maintain existing policy aggregates – 40% are not.
Pricing is only going one way - up
100% of buyers surveyed and 99% of insurers expect rates to rise this year. Further hardening is expected but only in the medium term. 75% of insurers think prices will continue to increase through 2022 but only 6% expect hardening beyond that. However, a third of insurers expect rate rises this year over 10%, and two-thirds think they will top out above 15%.
Coverage will be constrained
Insurers believe that buyers should expect change to their PI programmes with 94% expecting to offer more restricted cover for specific perils in the coming years. Buyers are seeing changes in the terms of their PI cover with 35% reporting higher deductibles and 29% a reduction in coverage. 24% are seeing more exclusions. It is noteworthy that 12% of the market has not addressed wordings in the last five-plus years, with 14% simply unable to remember when they last revisited wordings.
Changing market dynamics
Market disruption is likely to continue, with 83% of insurance market respondents anticipating market change in the form of new entrants, exits and consolidation. A further 39% expect more PI business to be written through MGAs, binders and delegated authority over the next two years. This finding is a little surprising given that as insurers are reducing capacity it is not unreasonable to expect that they would be inclined to underwrite less through third parties.
Konsta concludes: “That 58% of our respondents foresee financing and insolvency consequences due to recession as a top concern should give us all pause for thought. Likewise, as our research demonstrates, buyers will need to consider whether a separate cyber insurance policy is required to ensure that appropriate cover is maintained. Finally, the threat of regulatory intervention will see certain professions confronted with challenging premiums and, as a result, cover for these areas is becoming more restricted.”
Download the full report here.