July 2022 Market Update – Professional Indemnity

The market remains challenging. Some professionals cannot get cover, and if they can, it is cost prohibitive, and on ‘narrow’ wording. Those most impacted classes are construction professionals, followed by financial services professionals. The positive trend is that capacity is beginning to emerge from Lloyd’s of London. That said the intended narrowing of appetite by AIG will impact financial services and construction professionals. We have observed the following across the various professions:

An uplift of between 15 to 20 per cent has been observed. Where a practice has claims that have materialised; are involved in the audit of listed companies or financial institutions; undertake business valuations; advise on complex tax structures; and advise on mergers and acquisitions; there is limited or no insurer appetite. Claims against accountant practitioners from COVID-19 have materialised.

We are aware of 14 insurers offering quotations in this class. Each have varying appetite. A key issue for the profession is the extent to which AIG’s withdrawal will significantly impact rating. The profession’s peak bodies and Government continue to work on reform to ensure adequate compensatory benefits exist for consumers of financial advice. The cost of a scheme of last resort will simply put more pressure on cost for the profession.

Insurer concern will now turn to the broader economic issues which may impact the class: rising interest rates and the cost of living ordinarily involve redemption of investments. The Australian Financial Complaints Authority continues to exacerbate the longevity and cost of claims.

We are seeing increases of between 20 to 30 per cent. This however will vary significantly depending on the approved product list. Structured products, unregistered schemes, development funding investments and those with digital asset products are all of concern. Those who operate managed discretionary accounts and have clients with gearing are also non-preferred.

Overseas regulated and unregulated capacity has emerged. There is a wider appetite for the class: but at this stage no commensurate reduction in premium.

Funds that comprise retail investors have limited access to the insurance market. Where underlying investments include agricultural, carbon, mortgage, residential property, or any development assets, there is very limited appetite.

Schemes comprising sophisticated wholesale investors into direct property, equities and private equity investments are favoured. As foreshadowed in our last update there is now appetite for crypto funds and digital assets but these remain challenging placements and cover is costly.

Licensees for hire remain difficult to place, particularly where their corporate authorised representatives have varying types of underlying assets or have retail authorisations. Insurers are insisting licensees have strict protocols in place as regards oversight of Contractors’ All Risks (CARs) as a prerequisite when considering offering terms.

We are seeing increases of between 20 to 30 per cent. This however will vary significantly depending on number of capital raises, amount of raises and consistency in investment strategy.

Widely publicised building defect claims, new legislation imposing broader duties of care on construction professionals, judgments interpreting the new legislation and recent industry insolvencies are all impacting the class. Professional indemnity for construction professionals, design and construction contractors and principals (owners) is costly. Insurer appetite is limited, coverage continues to narrow, premium and excess structures continue to increase.

The withdrawal from the market of AIG removes one very active insurer operating in what is a very confined market. The withdrawal will see many of that insurer’s policyholders looking for new insurer partners. Without sufficient planning and strategy, those policyholders should expect significant implications on their next renewals.

Practices with claims history (in particular open claims), or those that undertake work on “complex” or “non-preferred” asset classes (for instance high rise residential, bridges, tunnels, dams, sea walls, jetties etc) are still continuing to experience significant uplifts. In some circumstances they cannot get cover.

Principals continue to insist on more onerous terms in their contracts. We are now even seeing some principal contractors requiring design professionals to have minimum excess amounts. Such requirement being a result of the solvency issues at present.

Principals’ commercial lawyers are unwilling to negotiate on the breadth of these contractual obligations, even if assuming same in fact prejudices the insurance policy. These issues are set out in greater detail in our article: “The impact of narrowing cover in the hardening insurance market: construction professionals & claims made policies”.

Insurer appetite continues to be driven by the nature of work performed. Firms engaged in large transactional work are less favoured risk – in-turn we have seen insurers not willing to quote those firms and if they do quote a higher rate per million applied.

We have seen most firms experiencing a 10 to 20 per cent uplift from their primary insurers, on their respective state schemes. Top-up markets have followed at the lower end of the rate increase uplifts (on average 10 per cent) unless the primary layer has been, or is likely to be breached, by a claim.

Cyber exclusions have been applied on most top-up policies placed into the London Insurance market or underwritten locally via agencies with London “security”. Following the trending of Environmental, Social and Governance (ESG) risk, we are also seeing broader exclusions being applied to exclude cover for claims pertaining to employment and other social/governance risk.

For more in depth market updates by product class, profession and industry, please see our individual reports below: