Various industry sectors have already seen a significant increase in their insurance costs and greater cover restrictions, this now includes Accountancy and Insolvency Practices, as insurance market capacity continues to reduce, and more insurance companies announce their withdrawal from the Professional Indemnity market.
All industries go through cycles of expansion and contraction and the insurance industry is no different. In insurance, we run on cycles of ‘hard’ and ‘soft’ markets, both of which can impact commercial businesses in different ways.
Currently, the market is hardening, and this means that the demand for insurance exceeds the supply available by insurers. Characteristics of a hard market include low competition among insurers, increased premiums, reduced coverage, charges for cover extensions, harsher interpretation of claims and in some cases, there will be no cover available for clients. In short, a hard market can make it extremely difficult for a business to obtain insurance cover at an affordable rate.
This is not the first time the UK has experienced a hard market; however, this is the first hard market we have experienced since the early 2000’s, a significant period of time.
What has caused the market to harden?
There have been several events and factors in the lead up to 2020 that have contributed to the hardening market:
- Solvency II – Insurers are having to double their reserves to meet the Solvency II requirement, leading to lower investments and less profit. Many insurers will therefore write less business or reduce their appetite to meet these requirements.
- Ogden rate change – The negative Ogden rate has significantly increased Liability rates, meaning large Personal Injury claims are here to stay for the foreseeable future. Therefore, the rates of most Motor and Liability books have had to increase to cover these additional insurer costs.
- Low Commercial Property Insurance rates – At the end of 2019, the property insurance market was running on loss-making rates. Regardless of what was to happen in 2020, these rates would increase.
- Flooding – Despite the market already losing money, it is estimated that Storms Dennis and Ciara at the start of 2020 could cost the industry over £500 million Property Damage and Business Interruption claims. Unfortunately, due to climate change, flooding is only going to get worse and insurance rates will need to increase to reflect this.
- Reinsurance rates – Reinsurance premiums are rising significantly, well into double figures and are estimated to increase by over 20%.
- Interest rates at an all-time low – Insurers will have to set rates for profit, not just for growth as they do not have investment income to rely on as they have in past times.
- COVID-19 – Although most COVID-19 disruptions were not covered by insurers, the small percentage of business interruption coverages that will respond are estimated to cost insurers billions of pounds. The full impact on the insurance sector with regard to other classes of business such as Directors and Officers together with Liability Insurance is yet to be established.
How does this affect my Professional Indemnity insurance?
Unfortunately, a hard market has a negative impact on commercial insurance clients as insurers will write less insurance policies, some will pull out of certain markets and fewer insurers will be competing for new customers. As a result, it will often become difficult for a business to secure cover at a similar premium as rates are likely to increase at the next renewal, particularly for those operating in high-risk industries. These measures are not a way for insurers to protect profits, instead they ensure the insurer is financially secure enough to protect, insure clients and pay claims.
How IRS can help
IRS and our parent company, Specialist Risk Group, have market leading in-house expertise in the Professional Indemnity market, with long-standing relationships with the majority of the market. As a result we can work with your business to source you a competitive Professional Indemnity quote in this notoriously complex market.
An early discussion should be had to obtain our view of the current PI market for Accountancy and Insolvency Practices and a plan for managing your renewal. This should be done at least two months before your renewal date so that you can avoid any last-minute premium increase or cover problems.
Aim to have renewal terms and alternative quotations available at least one month before your renewal date. Within reason, ensure that timings for the renewal process are pre-agreed and clearly understood by everyone, especially your broker.
Our expert team can undertake a review of your existing programme to highlight premium reductions, cover enhancements and service improvements we can make to lessen the impact of the hard market and ensure you get the best possible service from an insurance broker during this time.
Should you wish to discuss any aspect of your current or future requirements do not hesitate to contact us.