With insurers’ appetite growing once again, capacity has returned to the insurance brokers professional indemnity market in recent months. For firms, this is resulting in a reduction in premiums and insurers’ applied rate. Nevertheless, effective risk management and mitigation remains as essential as ever when it comes to getting the best deal.
Insurance brokers’ professional indemnity
According to FCA rules, it is the responsibility of all insurance brokers to take out adequate professional indemnity (PI) cover, and to consider the effect that the policy’s terms and conditions might have on their business.
In particular, the FCA advises that all firms carrying out insurance distribution activity, including brokers, refer to the PI requirements in chapter 3 of the Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (opens a new window) (MIPRU 3).
As a minimum, insurance brokers are required to have:
A limit of indemnity per year of EUR 1,300,380 for a single claim, or the higher of €1,924,560 or an amount equivalent to 10% of annual income (to a maximum of £30 million) for claims in aggregate
Continuous cover since the date of the firm’s authorisation
A policy excess (retention) that is not greater than £2500, or 1.5% of annual income, whichever is higher (if the firm holds client money, these values are doubled)
Appropriate cover for legal defence costs
Cover for any Financial Ombudsman Service awards made against the firm
The policy details must be reported correctly on the Retail Mediation Activities Return (opens a new window) (RMAR), which is the relevant FCA regulatory report.
Rates ease but risk remains
Premium rates for insurance brokers PI insurance have experienced upward pressure in recent years, largely due to an increasing number and severity of claims during the pandemic. While some insurers reduced capacity, others exited the market altogether, having deemed the risk to be too high. This reduced the coverage options available to insurers, and made securing desired coverage limits difficult.
The market has plateaued in recent months, however, with natural reductions in premium and declining of insurers’ applied rate. At the same time, premium rates have returned to profitable levels for insurers, driving appetite to underwrite new business and boosting market capacity, albeit with some amends to coverage, such as the removal of Covid-19 exclusions.
The impact of rising inflation, meanwhile, is fuelling interest rate rises, which in turn has boosted profits for many firms. Firms whose cover is based on a portion of income may need to reassess their coverage limits to ensure they meet requirements. Although inflation is also acting to hold up premium rates, the effect is negligible, with the overall market trajectory continuing to ease.
One observed change has occurred within the excess market. Split-out excesses have been common in previous years, with commercial lines and others of high-risk commanding higher fees. Fast forward to the present, and flexibility is returning, with a greater number of insurers offering flat-out excesses. Firms are likely to find greater room for negotiation on excesses than in previous renewal periods.
As ever, certain work will continue to be viewed as high risk. Brokers with access to the Lloyd’s market will inevitably face higher rates. Some insurers simply won’t underwrite Lloyd’s brokers. This is placing greater emphasis on the strength of renewal presentations. Insurers are keen to know how much of an insurer’s book is going via Lloyd’s, and the nature of the transaction – for instance, why is it going via Lloyd’s? Is it on a one-off basis, or is it a regular placement?
The benefits of broker engagement
The positive signs within the market are seeing a reduction in premiums and lower rates being applied by insurers. For firms, this should make the market easier to negotiate. Nevertheless, getting the best terms on cover remains essential.
As ever, firms that can demonstrate good awareness of their risk exposure are likely to benefit from more favourable terms at the point of renewal, and minimise the likelihood of a claim.
Recommendations for brokers include:
Provide staff regular training and continuous professional development – this can help to mitigate the chances of errors and omissions and ensure familiarity with changing regulatory requirements
Ensure rigorous documentation procedures are in place – including client visits, consent forms, and any other relevant paperwork, to reduce the chances of claims arising
Start renewal process early – this will ensure ample time for issues to be identified and resolved, for example where insurers request additional information; as always, insurers like to see detailed, concise submissions highlighting any changes of material information
Establish a response plan to be implemented in the event of risks e.g. learning from previous errors, regular quality monitoring meetings, ensuring filing systems are up-to-date
Establish a business continuity plan and ensure this is kept regularly up-to-date e.g. remote-working systems and procedures
For brokers looking to bolster their risk management and loss prevention protocols further, Lockton are willing to look to arrange an in-depth risk management review, including day-to-day office management, in-house documentation, claims procedures, and more.
For further information, please visit our Insurance Brokers and Independent Financial Advisors (opens a new window) page, or contact:
Kriss Stevens, Account Executive