News & Events

The Death Knell for Any One Claim cover in the PI market?

Tuesday, August 18, 2020

The PI market has been going through a tumultuous period following the tragic events at Grenfell Tower and now the uncertainty resulting from the Covid-19 pandemic. 

Prior to this, the market had been awash with capacity which had suppressed rates year on year. Whilst this was clearly unsustainable, insurers seemed loathe to take action to correct it, until the Lloyd‘s thematic review reported that Professional Indemnity (PI) had been performing poorly over a number of years and was now its second worse performing class. 

As a result of this, syndicate business plans came under intense scrutiny with many failing the Lloyd’s test. A number of carriers were either forced to or decided to exit the marketplace. Those that survived had their capacity reduced which resulted in tighter underwriting criteria, limited appetite for new business, and lower limits deployed.

At the same time, the market was starting to feel the impact of the Grenfell tragedy as the cladding notifications were becoming common place. The headline numbers for cladding replacement were estimated to be in the multi millions, with a number of block notifications hitting the market.

The Company market responded by following a similar path to that of the Lloyd’s syndicates particularly with the construction sector, which resulted in many larger firms being unable to comply with their contract conditions in terms of both limit and basis of cover, as capacity dried up. Any One Claim (AOC) limits were no longer the norm with some insurers not prepared to provide unlimited liability on higher risk products such as Design & Construction (D&C). 

Other casualties included Managing General Agents (MGAs), many of whom disappeared as their capacity was non-renewed or restricted, as their backers chose to prioritise their own direct product lines. 

However, this was not the end. The cladding issues had highlighted general fire safety issues in buildings which brought Architects, Surveyors, and Property Managers under the spotlight. Insurers’ nervousness around this exposure has led to professional bodies such as Royal Institution of Chartered Surveyors (RICS) agreeing to restrictions in its Approved wording including an aggregate basis, albeit with reinstatements, for this year at least.

To bring this all up to the present day, the Covid-19 pandemic has put the focus onto Insurance Brokers. Issues have been raised as to the suitability of business interruption cover to protect businesses whilst they were shut during the pandemic. Many claims were rejected which could lead to brokers facing allegations of negligence in not advising their clients of the extent of cover they had.

What else could be just round the corner and how do we prepare for it?

History shows us that a soft market has always been replaced by a hard market to correct the position, but the above events demonstrate that the problem cannot be fixed by a couple of years of rate increases. 

The provision of AOC cover can lead to significant losses. Block notifications, systemic issues, and now a pandemic - none of these give any confidence to insurers, syndicates, or their backers. Yes, the construction sector has been seeing a move towards aggregate cover, but when you see bodies such as the RICS accept it within their minimum terms then you realise that just maybe, such wide cover is not sustainable in the long run. Where is the sense in anyone wanting to provide unlimited cover with no cap on liability? What other industry would adopt such an approach to its risk? 

Whilst the UK and Irish Insurance markets have continued to offer this widest form of cover, both the US and Canadian markets exist happily on an Aggregate limit basis, so why shouldn’t we? As the industry lurches from one disaster to another, why would anyone want to invest in a class with no restriction in its potential exposure?

Insurers need to be confident that they can deliver a product that is sustainable for the long term, if you know your maximum downside then you can price accordingly. Consumers also need to have confidence in the product that they are buying. Not only do they want to know that their policy can be relied on in the event of a claim, but that their insurer will be there for them long-term, delivering a product that is consistent in both its cover and pricing.

Although this will not happen overnight, as a market we must learn from this and, unlike in other difficult times, guarantee that it does not happen again. 

Insurers were once considered as being safe and reliable. We should be aiming to earn that reputation once again.

How can TMHCC help?
If you have any questions about AOC cover, please contact John Booth, Underwriting Director, Professional Risks or click here to visit our PI page. 

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