July 2023 Market Update – Professional Indemnity

Professional indemnity (PI) premiums are beginning to stabilise, providing welcome news after prolonged rate increases and the narrowing of cover offered over the past 24 months. Increased capacity emerging from Lloyd’s of London and local entrants is increasing competition resulting in rate reductions and broader cover.

Despite these generally positive trends across the class, Bellrock is observing a two-speed market unfold. This is characterised by a distinction between lower-risk proposers and those in sectors deemed high risk or with significant claims activity.

Proposers that are considered lower-risk or those that have mature risk management processes in place (even in the traditionally complex markets) are reaping the results of improvement in procedure and risk management seeing rate reductions and broader cover. Insureds in higher risk industries and those with claims are still seeing limited capacity and facing difficulty in obtaining broader coverage.

A lack of appetite remains across the class however there has been a stabilising of premium rate rises due largely to an increase in capacity from overseas.

In NSW specifically, the industry is undergoing a period of significant legislative change with the result being increased oversight and broader powers given to the NSW Building Commissioner. See our article here. Similarly, in Victoria the Victorian Parliament introduced the Building Legislation Amendment Bill which intends to make significant amendments to the Building Act and the Architects Act by improving consumer protections for domestic and residential owners. The amendments are intended to adopt NSW’s approach by establishing a State Building Surveyor.

While extrinsic issues such as supply chain delays have eased, particularly since the COVID-19 pandemic, the combination of inflationary pressures together with the increasing cost of capital is adversely impacting the industry more broadly. Insurers are continuing to ask to sight financial statements to assess an insured’s cash flow and balance sheet – insolvencies in the industry are at a record high with the well-publicised collapse of building companies and subcontractors being an ongoing issue. For further commentary on construction insolvencies and impacts on insurance see our article here.

Building certifiers, geotechnical, structural and marine engineers continue to remain hard to place. Contractors must balance the value of the work vs cost of procuring appropriate insurance cover (i.e. principal’s indemnity, proportionate liability, contractual liability, pollution writebacks). There has been a trend of contractors successfully ‘pushing back’ on onerous contract terms with principals, however this is not prevalent.

A thorough and well-presented risk prospectus will provide proposers the best opportunity to attract insurer interest to achieve the best premium and coverage outcomes.

Fund managers are obtaining rate relief and in some cases discounts, but this depends on the extent to which there are new funds, capital raises, returns to investors and success of the investment strategy. Schemes comprising sophisticated wholesale investors into direct property, equities and private equity investments are favoured.

Fund managers with retail investors still have limited options for alternative quotes.

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 Corporate Authorised Representatives (CARs) as a prerequisite when considering offering terms.

Where underlying investments include agricultural, carbon, mortgage, residential property, or development assets, there remains limited appetite. Insurers are applying broader digital asset exclusions.

Capacity for financial planners remains constrained. AFCAs 2021-22 annual review reveals the second most complained about financial firm types in relation to investment and advice products were financial advisers/planners. As at 1 June 2023 financial adviser/planners were responsible for the greatest proportion of open complaints against insolvent financial firms.

Uplift on primary cover is around 10-15 per cent depending on work split and claims history. State schemes have further clarified the intention of cyber exclusions imposed by treaty obligations and payments that would expose insurers to sanctions breaches.

As regards top-up there has been new market entrants and additional capacity available this year. We have experienced rates “roll over”.

Conveyancing remains a high claims risk area amid the recessionary environment. The economic environment and potential defaults may see claims against law firms increase as lenders look to recover losses from professional advisers.

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