What does the future hold for insurance premiums, including professional indemnity?
With 2014 coming to a close, attention for businesses often turns to the next financial year, targets, budgets, and strategic plans for growth. For many the cost of insurance – particularly professional indemnity – is a significant concern and we are often asked for our thoughts on market movements/trends and anticipated pricing.
Over the last two years we have seen many bodies and organisations undertake broad benchmarking exercises amongst associations or other groupings to determine a mean average rate/cost of insurance. While there is some merit in this – to establish whether premiums are rising/falling or stagnating – the rate applied varies and is wholly dependent on the risk presented.
Each risk is evaluated on its own merits and underwriters consider a wide range of factors when agreeing terms; these can include exposures to past liabilities, activities undertaken, contracts and terms of engagement which limit liability, trending/propensity to claim amongst niche buying areas, changing legislation, rate of growth, financial risk management, attitude to risk management in the wider sense including adoption of mechanisms to limit exposure, claims/loss history, quality assurance and a myriad other factors in keeping with their own actuarial loss modelling.
In short, comparing the premium of business A with business B is far from an ideal comparison.
So what does the future hold? It is impossible to forecast, but looking to the re-insurance market we can gauge, barring major catalysts, a general outlook for the short term.
Re-insurance is insurance that is purchased by an insurance company (the cedent) from one or more other insurance companies (the re-insurer). Re-insurance rates are the main driver of market rates and re-insurance capacity is the main driver of market capacity.
The extent of re-insurance capacity determines how much an insurer has to offer to the insurance market and the cost of this is obviously a determining factor in the cost of premiums for UK businesses/consumers.
At present, re-insurance buyers are seeing the lowest cost of underwriting capital in a generation. In the past year, re-insurers have taken significant steps to incorporate more of the $59bn of alternative capital that has entered the re-insurance industry into their offerings to cedents.
The UK market is currently at the bottom of a soft cycle – the longest and most prolonged in history.
Key facts to consider:
general insurance premiums continue to fall in many lines and at best are stagnating
claims costs are increasing and the propensity to pursue claims increases
a recession is generally a period of increased claims (including fraudulent) activity. In 2013 there was £1.3bn of fraudulent claims – an 18% increase on the 2012 value
‘liability’ (including professional indemnity) was the UK insurance industry's worst-performing line in 2013, generating an industry-wide underwriting loss of £826m, according to ABI statistics (published 23 September 14). This underwriting loss was the largest for more than 30 years.
By contrast, property insurance was the most profitable line. The industry made a collective underwriting profit of £930m, despite the weather claims that hit at the end of the year.
Also profitable were accident insurance, with an underwriting profit of £16m and health insurance, with an underwriting profit of £271m. Overall, the industry made an underwriting profit of £1.4bn.
Short-term outlook While we cannot forecast anything with a degree of certainty we believe that barring a major world event/ catastrophe (or series thereof), or a localised issue such as the failure of a significant insurer, the insurance market will not shift to any great extent for the next 12-24 months.
Insurers will, however, reconsider their position in certain lines (and niche/trades areas) which are proving to be unprofitable. The change in approach to the UK PII market by carriers such as RSA, Aviva, WRB, and others is testament to this.
As a broad guide – based on current observed trends and market appetite, including certain insurers exiting from sections of the market – we anticipate the following to be a theme for the next 12 months in the professions arena:
Modest hardening rates:
accountants (tax planning)
solicitors (conveyancing)-excluding new entrants
quasi-legal (non-SRA) eg will writers
independent financial advisers
surveying and valuing mortgage brokers insurance brokers
accountants (non-tax planning)
media and technology
As stressed, risks are evaluated on their individual merits so if you have any queries or concerns please speak with your insurance adviser.
Chris Lennon – head of Lockton Companies LLP
Lockton Companies LLP is ACCA’s recommended broker for Professional Indemnity insurance. For information, please contact Lockton on 0117 906 5057.