Professional indemnity is an important insurance product for many industries. In fact, it is compulsory in certain countries – but getting the right insurance coverage at the right price is proving more and more challenging as market conditions tighten in the wake of the pandemic, says JÉRÔME GILLET (pictured), Alta Signa’s Branch Manager for France.
From law firms to architects and surveyors, engineers, to accountants and outsourcing consultants, professional indemnity (PI) insurance is an important backbone for many sectors in continental Europe where expert services and advice are provided for clients to act on. In some European countries, PI insurance is compulsory in certain sectors – rather like motor insurance – while elsewhere, having this insurance in place isn’t necessarily a regulatory requirement but is very often a contractual requirement between parties.
After more than 20 years of stable ‘soft’ pricing as it is coined in the insurance sector, it’s been another tough year for European buyers of PI, and the trends of higher pricing and harder terms we are seeing look set to continue – placing utmost importance on getting the right advice over insurance provider to get the best coverage possible.
A number of factors are behind this turn in the market. The pressure of such a long period of soft pricing on insurers books made some level price increases almost inevitable, but the competitive environment for selling PI insurers kept this in check until the pandemic struck.
As professional indemnity insurance often also covers the liabilities which are the result of negligence, such as business interruption and the significant legal costs incurred from being sued, the sector has faced continuing claims due to the business interruption resulting from the global pandemic.
This, combined with negligence claims stemming from the remote working dynamic of the COVID-19 lockdowns, and the ongoing volatile economic conditions that Europe is now facing as it emerges from the pandemic – not to mention the impacts of sanctions and supply chain shortages as a result of the war in Ukraine – is resulting in dramatically increased caution and scrutiny over risk selection from insurers.
Demand and supply
As the concern over increased claims for negligent services or negligent advice, breach of professional code of conduct, loss of documents or breach of confidentiality falling on PI contracts continues, the upshot for buyers of professional indemnity insurance is that there is less choice available due to restricted capacity and tighter wordings, and pricing has also increased.
And all this is happening exactly at a time when PI coverage is more important than ever for businesses. A number of insurers have completely exited the European PI market over the last few years, while some that have remained in play are offering more onerous policy terms and conditions that may leave some buyers exposed.
The time lag between a PI claim being lodged and paid (or disputed) means that we are yet to see the true impact of the pandemic on the PI market, let alone the impact of the economic
conditions we now find ourselves in. All this means that insurers expect claims inflation and severity in the PI market to continue rising over the next few years.
In this volatile market, it’s important to turn to specialist brokers and capacity providers who can demonstrate they are a sustainable presence in the market for the long-term, and have not just entered to capitalise on the higher pricing in the short-term and offer unsatisfactory coverage or service in the event of a claim.
As it stands, the European PI market is growing, driven by increases in outsourcing work, costs associated with legal disputes, the growth in the number of insurable enterprises, not to mention a wave of new legislation, guidance and regulations for professional services firms across the continent.
There is also a demand for comprehensive PI insurance that protects businesses as and when they need it – a theme being driven by increasing litigation. Some of the strongest new demand, however, is coming from business consulting services and IT.
What was once a market with little guidance, few submissions, large capacity, small premiums and no real claims – making it an ideal time to underwrite – IT (and therefore the world of PI-Tech) is unrecognisable from what it was 10 years ago. With more claims data, plus an understanding of cyber threats and claims – from business interruption to data breaches – insurers have been left with little choice but to raise premiums and narrow down what is actually covered in any given policy.
Changing guidance is also having an impact on what cover is available to purchase. In France, for example, guidance on ransomware has recently been amended, and where before insurers were left with doubts regarding the legal framework to pay ransomware, they now know that not the payment itself is illegal, but rather the often surrounding sanctions When combined with continuing evolving risks and increasing claims – both in frequency and costs – it is little wonder that insurers are putting increased scrutiny on risk mitigation.
With businesses great and small relying on IT infrastructure to operate, demand for cyber cover is understandably at an all time high. Despite this demand, however, there is a real restriction of capacity, which is driving insurers to exclude PI from cyber and vice versa. From an insurer’s perspective, this action is simply to prevent the risk of spiralling claims.
For sectors obligated to take out PI prior to practising their profession – such as legal, finance, insurance, accounting, construction and surveying – getting the right cover at the right price is crucial. Even for those professions which are self-regulated, or for those seeking protection on a voluntary basis, finding a professional adviser that can insure against incurables – from loss prevention and civil liability claims, to incomplete or subpar work, data breaches, and even defamation – can be a real challenge in the current market.
A tale of two halves
Despite the challenges, there are, however, opportunities to be found – if you know not only where to look, but understand the current state of the various markets too.
In France, for example, PI is compulsory for more than 60 professions, meaning competition is high; the result for buyers is low and stable premiums. For non-regulated professions in the region, the picture is that of decreasing demand and declining premiums.
In Italy, several professions also require compulsory coverage, including medical and paramedical, architects and engineers (A&E), lawyers, notaries and accountants, and policies tend to be acquired through a profession’s related association. Demand here is stable, unlike the non-regulated market, which is experiencing increasing demand, particularly where contractual requirements from clients request coverage. There has also been an increase in IT services, mostly for low limits.
For larger firms seeking compulsory PI cover in Italy, the open market is the only available option, which means buyers are being met with increased prices and reduced capacity. This contraction in capacity, combined with a sharp increase in rates, and a tightening of coverage types, has been driven by an increase in claims – both in costs and frequency – plus the closing of several Lloyd’s syndicates in the market, which has negatively impacted the number of market players.
In the Benelux region, the story is different yet again, and the outlook for PI – particularly that of commercial PI – is the need for greater stability. PI, however, is not compulsory in the Benelux region; however, for lawyers and law firms, it is widely advised that PI cover is taken out, and guidance is often offered to those companies looking to secure coverage.
Despite areas of stability in the different regions, there are also areas of concern. A&E and Single Project PI (SPPI), for example, are proving difficult in Italy and Spain; a trend mainly due to losses (typically that of construction company vs architect) and the multi-year nature of SPPI policies and the impossibility to recover a potential loss in coming years. Similarly affected is lawyer PI (again due to losses).
For most insurers, this is why the miscellaneous sector is more attractive when it comes to PI coverage, which for buyers opens up more options when it comes to coverage. However, regardless of which professions are being covered, there is one aspect that those seeking PI insurance should always take into consideration – and that is how much local knowledge
brokers and insurers have of an individual region.
To provide the right coverage, at the right price, local knowledge of regional markets – especially in Europe – is crucial. Only with a strong and knowledgeable team with ‘boots on the ground’ can insurers deliver highly disciplined underwriting and serve client needs with the flexibility, speed and quality they expect.
As we have seen over the past few years, the market is a volatile one, and there is no one size fits all approach; however, innovative and flexible capacity is available, and buyers seeking PI coverage should talk to their insurance partner or broker to explore their options. Because even if on the surface it might not seem that way, there are options and opportunities to be had.