Over the course of 2020 we have seen a significant contraction in the cover provided by insurers to construction and design consultants particularly around cladding exposures, loss mitigation costs, costs estimate and cross liabilities. This has resulted in a significant market retraction with several insurers either exiting or ceasing to write new business. This retraction in supply is also allowing the remaining insurers to increase their rates.
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.
Covid19
Amongst the multitude of problems brought on by a global pandemic, one of them is obviously a significant degree of uncertainty of what the future global economy will look like. In the past we typically have 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 on the likely impacts to your profession and the risk controls you have put in place to minimise the risks.
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. As a result, Insurers are now bracing for an increase in professional indemnity claims and many insurers have also told us that they have only just finalised claims arising from the global financial crisis (GFC) of 2007-2008.
State of the Professional Indemnity (PI) Market:
- In the first three Quarters of 2020, insurers continue to increase PI premiums reflecting the ‘hardening’ market’
- On average premiums have increased by 15-20% per annum but increases in certain professions have been in the order of 200% or higher with some risks finding it difficult to obtain any PI insurance at all
- Insurers are restricting cover and are looking for significant increases in both premium and self-insured retentions (ie excesses or deductibles),
- Insureds with paid claims or open notifications continue to experience the greatest impact
- Increased focus by PI Insurers on Insureds with ‘Combustible Cladding’ exposure
- Volatility in the Lloyds market has led to a significant reduction of PI capacity in the Australian market
- After Marine insurance, Professional Indemnity represents the second most exposed class of insurance for Lloyds of London and an exposure that Lloyds are now actively seeking to lessen
- Insurers are experiencing a higher frequency and severity of PI claims than ever before
- Insurers are reviewing risks more stringently and their response times are much slower than in previous years
Future Trends in the PI Market:
- Increased claim activity around Engineers exposed to Cladding/Non-Compliant Building Products
- Historically PI claims increase following an economic downturn
- Heightened concerns regarding the PI risks of Building Certifiers, Surveyors, Property Managers
- Increased concerns in respect to possible PI issues raised by the recent Royal Commissions into Banking, Aged Care etc
- Increased PI exposure of Covid-19 related issues for many professionals, and particularly for Accountants and Financial Advisors who seem to be increasingly exposed to claims of negligence for failing to advise their clients correctly in the face of the large volume of changes that have taken place in recent months
- Continued restriction of PI policy coverage offered mainly through the imposition of additional exclusions or tighter policy wordings
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.
What can you do?
Some strategies to keep in mind to help achieve a better result include:
- Return 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
- Be 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
- For 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
- Speak to your Planned Cover Broker regarding any concerns or changes in your practice
We’re looking forward to working with our current clients and new ones, to deliver the right protection for your insurance requirements, and we hope that 2021 will be a less eventful year for us all!
Cos Cirocco – National Business Manager
Karen Meiklejohn – State Manager Qld/NT
