As the professional indemnity (PI) market continues to harden, we’re here to keep you informed on the accountancy PI market specifically.
Recap: What is a hardening market?
Insurance markets cycle from hard to soft, which in turn impacts commercial businesses in different ways. After benefitting from ‘soft’ market conditions for more than a decade, the market is beginning to harden.
A soft market is categorised by capacity being easily obtainable. Insurers will try to increase their market share by adopting an aggressive pricing approach and offering enhanced policy coverages. Supply outweighs demand, driving premiums down and resulting in a buyer’s market.
A hard market is categorised by limited capacity. Insurers have less desire to grow and will be evaluating their book of business, appetite for risk and presence in the marketplace. Supply falls short of demand pushing premiums up – and businesses are often subject to stricter standards or policy terms.
The market has been hardening as a result of a number of global issues. The Lloyd’s Thematic Review of 2020 was a strong influence of some of the changes we’re seeing today. Lloyd’s established there were several members that were not charging enough premium to cover claims. In fact, this was a result of the insurance market softening too much. Lloyd’s mandated that their members needed to increase premiums to charge a sensible and economically sound premium otherwise they would not renew their capacity to trade in the Lloyd’s market. This caused a ripple effect across the market, with even insurers outside Lloyd’s market reviewing their portfolios and adjusting their premiums accordingly.
What does the hard market mean for accountants?
Accountancy businesses will continue to feel the effects of limited market capacity. We don’t predict any new insurers to enter into the PI market at this current time, and the insurers that remain have implemented a variety of measures to limit their exposures and reduce their risk of paying out costly claims.
These measures will impact your business, and include:
A request for extra information
Prior to renewal, your insurer may request more detailed information about your business operations, supply chain processes and current risk management methods. These requests can significantly impact the amount of time it takes to generate renewal terms. Be prepared, and speak to your broker early.
- Higher premiums
In order to compensate lost profits from a growing number of claims, many insurers have increased their premium rates—so you should expect to pay more for adequate cover.
- Cover restrictions
Many insurers have implemented serious restrictions upon policy renewals. Your broker should bring these to your attention and discuss any new terms such as limiting cover to a single aggregate amount, imposing a higher self-insured excess, excluding consequential or economic losses, and eliminating some policy extensions.
How will the COVID-19 pandemic impact the PI market?
Purely from a PI perspective, we simply do not know. Insurers are highlighting exclusions of cover for COVID-19 from a business interruption perspective within PI combined policies, but as yet nothing has been highlighted specifically from a PI point of view. The UK’s high court judgement on the Financial Conduct Authority’s (FCA) business interruption test favoured policy holders in the majority of key issues, which could have an impact on policy wordings going forward.
Marsh Commercial’s markets team remains in daily contact with insurers to ensure we are fully aware of any proposed changes to policy wordings, endorsements or exclusions. Generally, we’re experiencing good insurer support within the accountancy marketplace. If your accountancy practice carries out any of the activities below, ensure you contact your broker well in advance of your renewal:
- corporate finance
- mergers and acquisition
- financial services
- tax mitigation/avoidance.
Some of our clients have enquired about the implications of deciding to cease trading ahead of any original retirement plan. It’s important to keep your business protected through the purchase of run-off insurance. The ICAEW requires you to maintain run-off cover for a minimum period of 2 years, however they recommend 6 years, due to the standard statute of limitation. If you’re part of Marsh Commercial’s ICAEW scheme, we have negotiated a block policy to insure the run-off cover period of 6 years, giving you that extra peace of mind that cover will be there for any claims that arise during this period.
Secure PI cover in a hardening market
We’re here to help you maintain the cover you need, despite the implications of the hardening PI market.
- Communicate with your broker
Keep your broker informed about your business. Regular communication ensures your broker is aware of changes to your business activity and risk - well in advance of renewal. In a hard market, it will take them significantly longer to work with insurers and find you the best insurance solution.
- Start the renewal process early
In a hard market, you can’t wait until the last minute if you want to secure high quality cover. With this in mind, be sure to engage in your PI policy renewal process as early as possible. Doing so will give you plenty of time to gather any documentation required for renewal or to answer questions about your business operations from insurers.
- Invest in risk management
Now more than ever, it’s vital to invest in robust risk management processes and provide documentation of these practices to your insurer at renewal time. Your risk management documentation should highlight:
- proper cash flow processes
- client contracts that clearly outline the responsibilities of both parties
- effective supply chain management (e.g. positive relationships with suppliers, due diligence of supply chain risks and well-distributed liability agreements)
- robust internal practices and standards to mitigate on-site risks.
Safety in numbers
There is, however, much better news for ICAEW private practice members. Marsh Commercial has worked closely with the ICAEW for the last 14 years, creating an accountants professional indemnity scheme that operates as a separate “market” or “risk pool”. ICAEW members benefit from a level of insulation against the rising premiums currently affecting the wider market. This is one of the major benefits of taking part in a scheme, rather than relying on the open market.
Why is this?
Firstly, our insurer, QBE, works with us in full knowledge of the overall risk profile of ICAEW private practice members. Indeed, it’s hard to imagine any insurer entering into an agreement to back a membership scheme without first carrying out due diligence and risk profiling. That means a scheme insurer, like QBE, is more comfortable than an open market insurer in taking on some higher risk work – because it knows that, overall, higher risk will be balanced out by a majority of lower risk clients.
This bubble of insulation applies to ICAEW members taking part in the scheme too. Today, Marsh Commercial provides protection for over 3,900 ICAEW private practice members, through a policy designed in conjunction with ICAEW. The strength of this scheme enables us to negotiate improved terms with insurers, for example, QBE has enabled us to ensure the scheme offered level terms for the majority of members and protection against the vagaries of the external insurance market. As a result, ICAEW members working with Marsh Commercial are unlikely to experience the kind of premium rises that are now commonplace in wider PI markets – so now is a good time to ask for a quote from the ICAEW’s appointed PII provider, as part of ICAEW Member Rewards.