A hard market occurs in Insurance when prices rise and policy cover starts to be restricted.
The last hard market occurred in 2001, following the September 11 terrorist attacks, coupled with the insolvency of one the UK’s leading Insurers- Independent Insurance.
The market has been softening since 2003, leading to broad coverage and premium reductions, driven by a surplus of competing insurers. A soft market is really a buyer’s market.
Many Professional Indemnity customers have become used to these market conditions and indeed many customers may never have experienced anything but a soft market.
As an example, a Professional Indemnity Underwriter that we know well often uses the example of a firm of Architects that used to pay £ 40,000 for their Professional Indemnity Insurance during the last hard market.
In 2017 this same firm of Architects was only paying £ 4000 for their Professional Indemnity cover.
Unfortunately, this competitive marketplace eventually takes its toll on insurers….
Lloyds of London made a pre-tax loss of £ 2 billion in 2017 and a pre-tax loss of £ 1 billion in 2018.
Lloyds has no doubt been hit by numerous worldwide disasters such as hurricanes and other natural catastrophes in the last few years but the issues run deeper than this.
A strategic review of how Lloyds was performing highlighted the fact that certain classes of insurance were very unprofitable. One of the main culprits was the Professional Indemnity market with most Lloyds syndicates paying out more in claims then they had collected in premiums by chasing market share rather than profitability.
As a result of the review the Syndicates have been told to take remedial action to tidy up their books and profitability. This has led to several syndicates pulling out of the PI market altogether and the remaining syndicates looking for substantial increases in premium to try and write the risks at the ‘Technical price’ that they need to make sure that the risks actually make them money in the long term.
With Design and Construct PI there had already been a market reaction following the 2017 Grenfell Tower tragedy, with not only the cladding industry facing increasing premiums and restricted cover, but also those involved in high-rise buildings or fire protection.
Following the Lloyds review, contractors undertaking design work are seeing an increase in their PI premium with insurers also trying to limit their liability. Some insurers are trying to impose aggregate (the total of claims allowed during any period of insurance) limits rather than any one claim, include defence costs within the limit (previously costs in addition was readily available) and apply the excess to defence costs, rather than just the compensation part of the claim.
These limitations may be an issue to contractors who have contractual commitments for certain levels of cover, although such agreements do tend to have an ‘assuming commercially available’ get-out clause and in most cases wider cover is still available, albeit at a cost.
Whether the market has over-reacted remains to be seen, but it is anticipated that the hard market for Design and Construct risks will continue for the foreseeable future and customers with a Design and Construct exposure should be budgeting for this going forward.