News...
Regulate to accumulate
Greater discipline through reputation has made the brokers’ professional indemnity market more attractive – and crowded. Jane Bernstein reviews recent market developments and the wider dynamics at play.Sometimes there isn’t enough focus on product and too much on price. Your payment is only as good as what it is buying – it is an industry-wide problem.
Professional Indemnity cover for brokers has been available at competitive rates for some time, thanks largely to a soft market. The question is whether emerging issues, such as Financial Services Authority regulation, will put pressure on the market to tighten its belt or whether increased competition will lead to further premium cuts.
Opinions vary on whether FSA regulation in itself will see more PI providers entering the market. Graeme Trudgill, British Insurance Brokers’ Association manager of technical services, says it is likely that providers will anticipate the requirements of intermediaries and promote a range of new facilities. “Some underwriters will be keen to write the business while others will be more cautious,” he says.
Indeed, Simon Wright, divisional director of Holman’s, which recently teamed up with Brit to launch a new brokers’ PI product, observes that the broker market is more attractive now “because of the hoops they had to go through to achieve their FSA compliance”.
There have also been developments from established providers that are directly related to FSA requirements. Hiscox, for example, now offers a product specifically for secondary intermediaries. However, the brokers’ PI market in general is already crowded, and it is questionable whether there is room for new providers entering the sector.
Gary Head, Hiscox underwriting director for professions, explains: “There has been an influx of capacity into the UK’s PI market so rates and prices have been falling rapidly. Even though there is an increased requirement for brokers to obtain PI, there are already a range of options available.”
Mr Trudgill also points out that regulation has arrived at a time when the general market is soft. “Coverage is not too restrictive, and prices have come down. There are likely to be some innovative developments but this happens as part of a dynamic marketplace, with or without regulation.”
Biba itself has launched an initiative for its members offering cover through
three specialist brokers – First City, Alexander Forbes and Towergate.
Mr Trudgill explains: “There is no necessity for brokers or intermediaries
to go to these accredited brokers. They are still free to buy their insurance
where they choose. However, Biba is confident that they are able to offer
good advice and represent most, if not all, of the available insurers offering
this class of business.”
Niall Innes, a partner specialising in PI at Weightmans, says one of the advantages
of FSA regulation should be brokers having the required documentation to defend
a claim appropriately. He believes that it could also prove problematic for
those without the resources to comply with statutory requirements, while Mr
Trudgill observes that the improved practices and training in a brokerage
should reduce some of the “inexcusable claims” that have occurred
in the past.
Risky Business
As with any profession, some businesses are a greater risk than others and
more likely to call on their PI cover. Mr Head says Hiscox considers the complexity
of the transactions undertaken as part of the underwriting process, and that
areas such as reinsurance transactions and alternative risk transfer mechanisms
are inherently more hazardous than personal lines broking.
Colin Plumb, a partner in professional risks insurance at First City, emphasises that every broker or intermediary is unique and produces different aspects of risk. “The main rating factors are the types of insurances they arrange, the sum assureds they place and their experience.” He points out that it is essential to consider that some risks are complex to arrange, and that it is equally prudent to remember that a loss arising out of a motor claim could run into millions of pounds. “What would be the total cost to a PI underwriter if, for example, a claim was made from a circumstance similar to the Selby train crash?”
Newer businesses inevitably raise concerns as they represent an unknown risk. “The new breed of retail intermediaries do not have a long enough claims record by which they can be judged,” says Mr Trudgill. “It is likely that their claims record will prove to be good because their insurance sales will mainly be simple transactions of a standard and unchangeable insurance commodity, requiring little of no advice.
“Unless there is a scandal in a particular class of insurance, there is every reason to believe that this risk should not be extraordinary,” he says.
However, the controversy surrounding the sale of payment protection products has led to fears over mis-selling.
Despite this, Simon Burgess, managing director of PPI specialist British Insurance, says he has seen a 20% reduction in the firm’s PI premium. He comments: “It is not all bad news. If you do your job properly and embrace the fair treatment of customers then you will see reductions in your PI cover. It is about how, rather than what, you sell.”
Mr Head agrees: “There are organisations that are capable of selling PPI, and their clients are fully aware of what they are buying. In our underwriting process, we are seeking to ensure the methods and activities practised in firms are fully conversant with regulations and are acting in the best interests of customers.”
Good v Bad
This also holds true for brokers across the board. As Mark Cassidy, QBE’s
professional liability portfolio manager, observes: “The key is that
there is good and bad in all professions, and the bad ones are those who don’t
know how to run a business – those that don’t know how to run
a business tend to have poor claims records.”
Alan Eyre, managing director of Towergate Professional Indemnity, points out
that regulation will bring greater discipline: “From a risk management
perspective, anything that provides evidence of what you have done is normally
a plus.” He expresses some concern, however, regarding the increasing
competition in the brokers’ PI market. “Sometimes there isn’t
enough focus on product and too much on price. Your payment is only as good
as what it is buying – it is an industry-wide problem,” he says.
Brokers have been enjoying lower premiums for their PI cover, though it seems unlikely that the current soft market will be sustainable. What is unclear, at this point, is just how far FSA regulation will rock the boat when it comes to future claims.
MAY 2006 - POST MAGAZINE
