Professional indemnity market update — part one: How we got here

After experiencing several years of hard market* conditions, the UK professional indemnity (PI) insurance market has transitioned to a softer market**. In the first part of our three-part series on the changing PI market, we discuss the history and current position of the market.

Historical trends in the PI insurance market

2018 to 2021: The hard market years

The hard UK PI insurance market from 2018 to 2021 was extremely challenging for all involved — leading to some insurers pulling out of the market due to many years of unchecked “over-competition”. Premium rates across the PI market had been reduced to levels, year on year, that could not cope with the claim losses of their books of business. This culminated in a Lloyds of London review in 2018, that revealed some Lloyds insurers had been running for multiple years at a loss ratio of 110% across PI — excluding the US. Simply put, these companies were paying out 10% more in claims and related costs than they were gaining in premium. As this was unsustainable, some insurers in the PI market made significant adjustments to continue trading. These insurers had little desire to seek new business, which resulted in many brokers only being able to negotiate the best outcome from the incumbent market.

Furthermore, as no new entrants appeared in the market, PI buyers' bargaining power was reduced in many situations. Limits were reduced on primary layers and some sectors moved from any one claim limits to aggregate limits — causing contractual issues for many PI buyers. Excesses were also raised, and coverage language started to be “written back out” of policies, with restrictive terms placed on many higher risks sectors.

2022 to 2023: The market begins to improve

In early 2022, signs of stabilisation emerged in the sector after a period of rate correction. Initially, this was a modest plateau improvement where many insurers were content that premium rate was adequate going forward. This was of course on the proviso that a business risk profile looked pretty similar to the preceding year. Through to the end of 2023, the market continued to improve significantly, new insurance capacity started to enter the market, and the appetite of insurers to cover new business grew significantly.

2024: Forward movement in the PI market

Market improvement further accelerated during the first quarter of 2024. Some key strategies and tools that brokers can now offer participants in the UK PI market, include:

Programme restructures enabling insurers to write higher limits on a single layer of insurance again — reducing the number of layers on a programme can limit the overall premium.
Previous challenges in the hard market, such as PI buyers being restricted to an any one claim limit basis and being forced to move to an “aggregate unlimited reinstatements” limit basis (or even just aggregate basis), are now being reversed in some cases. This can reduce costs of excess layer policies and open tender opportunities for businesses.
A stronger ability to leverage coverage improvements, with brokers’ own wordings now coming back into consideration.
A targeted marketing exercise as the appetite for new business grows.

Many insurers may have “demanding budget targets to hit”, which indicates that a soft market cycle is likely to be embedded as there is an appetite to write new business, and that the market can function as it should for all parties. Therefore, some industries, possibly off limits in previous years, may now be considered for insurance.

Macro level pressures on the PI market

The market will not remain static, and factors such as capacity and rate competition can have significant effects. Ostensibly, loss rates in various sectors could harden insurer appetite again as could macro level factors such as:

Regulation and legal: Changes in various statutes or regulations governing a professional sector can see a period of professions acclimatising to the new regulatory landscape. This can often promote a wave of claims. For example, changes to the HMRC’s tax consultancy has often triggered a wave of claims in the accountancy space. Looking forward, the Building Safety Act in construction and property could start to impact businesses in this space. There are also forthcoming changes to audit and tax laws affecting the accountancy sector. Additionally, legal precedent can narrow or open up liability across the professions space.
Culture: Social claims inflation and the impact of environmental, social, and governance (ESG) issues are current talking points regarding the future state of the PI market. Insurance concerns about underwriting moral hazards and professional advisors incorrectly advising on ESG issues, are some of the points explored in further detail in the second part of this PI update.
Institute coverage compliance: Both the Institute of Chartered Accountants England & Wales and the Royal Institution of Chartered Surveyors (RICS) are due to announce changes to their minimum PI terms and conditions — with the aim of providing better coverage for members. However, such changes may actually motivate some insurers to withdraw from the sector. For instance, during the hard market there was a risk of this in the RICS survey and valuation space when RICS attempted multiple times to give fire safety coverage to its members beyond what the market was prepared to offer.
Economic: For any market tied to institutional investment, wider economic trends affect capacity and rate in the market. Also, recently the insurance industry as a whole is experiencing rising costs of dealing with claims, above even the high levels of base inflation rates — due in part to both a rise in ESG claims and social inflation claims.
Technological: The risks imposed by AI are also relevant to future PI market developments, including the fears of reducing the foundation knowledge of young professionals in various sectors — a topic discussed in the second part of our PI market update.

In the second-part of our series on the PI insurance market, we analyse a few important factors affecting the market in more detail, such as ESG, AI, legal precedent, and updates in the technology and accountancy space.

*Hard market: This means increasing rates, a lack of appetite for insurers to quote on new business, and more restrictive terms.

**Soft market: This means competitive rates, an excess of insurance capacity active in the market, and favourable policy terms.

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