The professional indemnity insurance space is congested, yet still growing. So how do insurance brokers win a slice of such a burgeoning but competitive area?
The professional indemnity (PI) insurance space is one that has experienced rapid change in the last decade. It has swiftly evolved from specialist niche to seemingly the space every insurer and broker now plays within. The increased insurance industry focus is warranted though. Previously PI insurance was for the professions who most obviously needed such cover, but two aspects have emerged: firstly more regulation and contractual requirement is demanded of a wider range of professions than ever before. Secondly, there has been a more organic rise and appreciation of the advantages of having such a policy in place. More professionals than ever before are aware of PI insurance and are taking out such coverage off their own backs.
The demand has sparked the supply, and no-one in the insurance industry is denying we are dealing with a packed sector of the market.
“The PI space is overcrowded,” bluntly says Paul Lynam, chief executive of SRS Underwriting Agency. “We focus on the service side for our brokers as they have so many options.”
“There are loads of options in the PI market,” concurs Rhys Mills, managing director of Solution Underwriting Agency. “When we launched two years ago we understood we were coming into a market that was well catered for, we had competitive pricing, but you need to offer more on that service side as there are so many options for brokers.
“We have quite a broad appetite in terms of the professional indemnity we offer. We do everything from bookkeepers to mining engineers. We are across just about every occupation that is out there. There are certainly quite a few markets which offer what we do, so the brokers certainly have a choice in who they go to,” explains Mills.
James Stringer, Zurich’s national underwriting manager, says: “There is substantial competition in the PI market as there are a number of insurers in Australia who will write PI. There is certainly more competition than there has been in the past when the market was in more trouble with lots of claims and not enough premium.
“Pricing is flat as a trend, but we are seeing coverages become more responsive to customers’ needs as insurers try to accommodate customers’ requirements. If you go through Zurich’s products, where 10 years ago you might have had one PI policy that would be miscellaneous which you would then adapt for individual industries, now you have profession specific policies.”
Stringer cites that another PI development is that claims costs have been trending upwards. He puts this mainly down to the GFC from a few years ago, where disagreements are now starting to crystalise to the point where they have become a legal matter. “When you get tougher economic times you will get more disagreements that might have been resolved in boom times,” he says.
“We are enjoying success across all of the professions taking up PI, but a lot depends on what is happening in that market segment at any given time,” says Stringer. “If I had to nominate a professional area doing particularly well, I would have to say the architects and engineers, design and construct areas are always very competitive. We are seeing more opportunity in that space at the moment as there have been some claims in the market.”
There is a broker-insurer relationship elephant in the room though. The recent Richard St. John inquiry into financial products and services in Australia claimed that with the PI market many insurers are reluctant to offer brokers all the cover they need, which then forces brokers to implement a layered policy using several insurers.
The Compensation Arrangements for Consumers of Financial Services report stated that insurance brokers then find difficulty acquiring professional indemnity insurance that meets ASIC requirements of adequacy.
Contributing to the report, the Financial Planning Association, states: “There is an extreme inadequacy and unavailability of professional indemnity insurance for financial advisers and licensees in Australia.
“There are three to four underwriters in [the financial planning space] offering policies with multiple exclusions and inadequate cover to meet the RG 126 requirements.”
NIBA also contributed to the report and suggested that the PI market is harder given the recent adverse claims and dispute experience.
“NIBA understands that whilst aggregated adviser groups can still obtain compliant PI at reasonable cost given the number of participants, smaller advisers may face difficulty, dependant on their claims experience.”
The report highlights that when a broker needed $20m of cover, it may be forced to implement a layered policy from two insurers who share the risk.
NIBA adds: “In relation to insurance brokers, as the risk has remained relatively stable along with the PI requirements that applied before the Corporations Act 2001, so too has the premium and availability of insurance.
“In relation to investment advisers the trend has generally been towards a lessening of capacity as insurers withdraw from this specific PI market as a result of the increasing claims experience trends. NIBA understands that the costs have been increasing and the flexibility of terms decreasing.”
However, David Bailey, managing director of Eagle Insurance Brokers, says that the brokerage has been successfully operating in the professional indemnity insurance space for several years.
“Our success rate continues to grow,” says Bailey. “We have a national scheme for real estate agents which runs very well, while rates are stable and cover availability is good. It is only a couple of markets that cause us issues.”
Bailey says those troubled markets where there is reduced capacity offered by the insurer are professions who have high instances of litigation, such as property valuers and engineers.
“This has resulted in the need to buy excess insurance whereas previously this was never an issue,” says Bailey. “Generally speaking this is only necessary where the limit of indemnity required is in excess of $5m.”
“Certainly there are some professions where it is difficult to get coverage,” said Zurich’s Stringer. “Financial planners and property valuers are finding it difficult to find cover in the Australian market. This is forcing them to go to markets such as Lloyd’s and they are paying much higher prices for PI insurance. But in insurance the price charged is based on the experiences of the insurers that write that type of business.
“Zurich does not write PI for those professions, and never has; it is not part of our business strategy. What insurers cover are insurable risks and PI is about fortuitous loss, it is not a financial guarantee for every risk in the business. A lot of the Richard St. John inquiry did not apply to Zurich’s portfolio. In terms of engineers though, I don’t think getting the coverage is the issue, rather the problem is getting the cover at a price that the customer is prepared, or expects, to pay.”
So what will the future hold for the PI insurance space? Is the growth from the last 10 years sustainable, or will those clambering to do business in this area eventually find themselves in a saturated space?
“I did not think when I started in the industry writing PI 25 years ago that we would be where we are today,” continues Stringer. “We are seeing increased coverage needs, new covers that we would not have even thought of all those years ago, and we are seeing more brokers specialising and more insurers underwriting these exposures.
“We are almost at the point that there is not a huge amount of cover left to be given. I doubt that covers will go backwards though. PI insurance has a healthy future, especially with regulatory and legal changes increasing the need for it. So it will continue to grow, in areas such as security and privacy, and insurers will find ways to meet customers’ needs as they evolve.”
Mills agrees that the PI space will continue to grow, with new professions becoming more interested in the cover and further legislation creating contractual obligations for PI insurance.
Brokers have a plethora of options when it comes to PI insurance cover and that plays into the hands of the type of service that brokers offer. Clients will be looking to adopt insurance in a specialised niche which has a baffling number of options; that is why brokers are, and will continue to, do so well in PI.
THE BROKER OPPORTUNITY
James Stringer, Zurich
“Speaking as a former broker, brokers should be offering PI insurance. They should be offering it as part of a review of clients’ needs and that is something that every broker would be doing. A lot of customers are finding that they are required to have a PI policy in place to win business. A broker recently said to me that you need millions of dollars’ worth of cover to sweep a floor in NSW under government legislation. In the past PI was for pure professionals – an engineer, accountant, a surveyor, lawyer etc. – but over the years with legal trends and government regulations that has expanded out to anyone who provides services of a specialised nature. That is an opportunity for the broker. We have even seen brokers set-up divisions within these PI specialisations as it is quite a complex area. This complexity is growing further too, which only presents further opportunity for brokers to meet their customers’ needs.”
Rhys Mills, Solution Underwriting Agency
“It is still a competitive and growing area. That is important for brokers looking to expand their portfolios; PI is certainly a good area to achieve that growth. Brokers are going well in PI and brokers have become more confident working in this area. Previously there was a bit of a fear factor associated from the brokers’ point-of-view in dealing with PI. It was seen as being a very specialised segment of the market and you had to be a very specialised broker to provide a price on PI insurance. That can still be the case in relation to certain areas and professions, but most aspects are well within the realms of the general broker to look after PI now. The broker needs to establish if their clients provide advice or design to their clients and whether that could result in a financial loss to those clients. There is then exposure to those people as they are offering expert advice in a field, so there are certainly occupations where the PI exposure is obvious and they need that PI policy in place.”