The professional indemnity (PI) market for UK design and build contractors has been confined to intensive care for quite some time. If you have been even tangentially involved in UK construction over the last few years this will not be news to you. Our Head of UK Construction, Dave Cahill and PI specialists, Conor Geraghty and Matt Jones, look at how we got into this position and what's changing in the first quarter of 2021.
Insureds enjoyed a soft insurance market for well over a decade, when plentiful competition for business first reduced, and then supressed, premiums and broadened coverage. Many of the extensions of coverage we saw as standard within the market were taken for granted, for example any one claim cover, fitness for purpose clauses and contractual liability extensions. The drive for underwriters to secure premium volumes provided a distraction from long-term profitable underwriting. This may sound like poor business practice, but it needs to be understood that for PI insurance, losses develop slowly and well after the period of insurance has expired. Full maturity of claims, and therefore a full understanding of profitability, may not be available for as much as ten years after the policy has closed. It is for this reason that when long-tail insurances like PI correct themselves, the corrections are often severe. The PI market was hit with heightened claims activity at a time when the pricing underwriters were charging for the cover being offered was already well below what needed to be charged for the market to sustainably trade. And so, the resulting years have required drastic remediation.
In 2015, the first cracks started to appear in relation to waste to energy (W2E) projects. There were some notable problems with these projects throughout the UK, several of which were reported widely in the trade press. A common theme for these problems included major UK contractors delivering (and therefore assuming responsibility for) projects involving and reliant upon complex technology provided by specialist subcontractors. Their insurers experienced large losses and as a result sought to implement more rigorous underwriting and punitive terms (especially increased excesses) for those firms exposed to the sector. Similarly, renewable energy projects also began to drive claims, most notably from the construction of offshore wind farms. The inherently complex nature, large scale and technological sophistication of these projects led to high profile claims activity. In some instances, insurers removed their capacity entirely. Those remaining looked to remove consequential loss cover and/or impose sizeable excess structures.
Against a backdrop of declining profitability, June 2017 saw the Grenfell Tower tragedy. 72 residents were killed and 70 others injured, not counting the emotional toll on those who survived or witnessed the horrific events in West London. Apart from some initial “knee-jerk” underwriting, it was some time before the consequential impact of the tragedy, the phenomenal cost of remediating cladding and fire safety systems in other buildings, was properly understood.
Remedial action from insurers
It was therefore not until 2018 when insureds felt the hard market bite. Initially manifesting itself in substantial additional information requirements as part of the renewal process, this quickly advanced to include some additional restrictions and corrective pricing being applied. These included full or partial exclusions for cladding systems, (the partial exclusion applying to consequential losses thereby only providing rectification coverage), and subsequently escalated from just cladding to any fire safety systems.
In 2019, things worsened significantly following a performance review undertaken by Lloyd’s in Q3 2018, whose marketplace is used by many of the underwriters transacting PI business in London. Driven by concerns over solvency, Lloyd’s sought to identify and remediate those classes of insurance that were perpetually delivering losses. Non-US PI was determined to be the second worse performing class of business in the whole of the Lloyd’s marketplace and tough capital sanctions were threatened on those insurers who failed to remediate this position. As a consequence, many underwriters withdrew from PI business altogether and those that were left had no choice but to balance the books. Those continuing to participate universally reduced the capacity they were prepared to deploy as a method for returning to profitability.
2020 was in many ways a continuation of the remediation strategies imposed in recent years. It saw much of the same with underwriters, brokers and particularly insureds trying to establish whether there was going to be a further market hardening, a correction back to historic rates and coverages, or whether we had reached a new equilibrium.
So what will 2021 bring?
For the most part, a more stable rating environment. This is positive news since all preceding years since the market downturn in 2018 have been uncertain, and uncertainty is what brought around the severe pricing volatility and reductions in coverage offered. Rates will continue to increase, but pricing corrections for the duration of this year look to be less severe. This means we anticipate less ‘’knee-jerk’’ reactions from underwriters with an improved ability to accurately estimate results.
The significant corrections, both in terms of pricing and coverage offered over the last few years, have successfully improved underwriting profitability to such an extent that some existing capacity providers will look to grow their market share in 2021. This year will also see new entrants to the market. Both of these developments allow access to a wider pool of insurers writing PI business, which will have the impact of improving the overall competitiveness of the marketplace. However, it’s important to note that these changes are claims dependent. PI insurance premiums have always been very sensitive to claims activity, particularly recently developed claims. Risks with unfavourable claims histories will be remain difficult to place, with insurers applying continued pressure on premium and terms.
Despite the increased capacity, insureds will have to accept that we have entered a new paradigm and it is unlikely that there will be a return to what we are increasingly seeing as “the good old days”. A good example of this is the higher quality of contractor sought by the insurance market, especially now that reduced capacity allows underwriters to be more selective. This calls for a different approach to renewal, which should include the following elements as standard:
- Better quality underwriting information presented to insurers - alongside a detailed description of the business, this should include key risk management information in relation to vetting of subcontractors, management of design risk and commercial controls in relation to contractual undertakings.
- A longer renewal cycle that will take a minimum of three months and for which you should ideally allow six months.
- Taking the time to meet with underwriters to build relationships and trust - this should be an easier task both during and after the pandemic as conducting meetings remotely is now commonplace.
- As competition has reduced so dramatically, insureds and their brokers have to be more creative - it’s no longer possible to manage the cost of PI insurance by marketing risks and using competitive pressure. There are limited levers remaining, but the level of retained risk through the excess or deductible is one that continues to deliver good results.
As always, Miller’s Construction and PI teams are here to help. Contact any of our specialists below to discuss your renewal or new insurance requirements.