2022 Market Update – Professional Indemnity
It has been one of the most challenging insurance markets for professional indemnity insurance. Insurers have experienced losses and undeniably more are on the horizon. According to APRA statistics released in September 2021 the gross loss ratio for the class was 90%, compared to 105% commensurate to the 2020 period.
Whilst at face value the decline in loss ratio appears positive, it must be read next to the commensurate increase in GWP for the period, being an uplift of AUD2.7bn to AUD3.5bn, approximately 30 percent.
Government regulators and principals are insisting on broader cover and higher policy limits – this being driven respectively by public policy issues (consumer protection) and intended risk transfer strategy.
We know that many professionals cannot conform with professional standards (obligations to hold minimum professional indemnity) or are in breach of their principals’ contractual terms. Principals’ terms are increasingly becoming more onerous – broad ranging indemnities, hold harmless provisions, requirements to contract out of legislation and holding practitioners to higher standards of care are all common. Commercial lawyers are insisting on such broader obligations and in-turn expecting insurers to transfer these risks via the professional indemnity market.
We have observed false certificates of currency and individuals being furnished with ‘evidence of cover’ procured via online intermediary and insurer platforms. Such systems were not designed to cover the professions purported to be ‘insured’ via these systems. We have significant concerns about the validity of cover procured in such a manner in the event of a claim (see our article here). We flag this to insurers, principals, principal contractors, Australian Financial Services Licensees and regulators.
Simply put, some professionals cannot get cover, and if they can, obtaining adequate cover can be cost prohibitive. The escalating cost of professional indemnity insurance is having a negative impact on public policy and risk transfer strategy. We understand Government is in consultation with some professional bodies and otherwise the legal fraternity. This along with proscribed professional schemes may entice insurers back into the market for the most impacted professions.
We have observed the following across professions:
We have seen an uplift of between 20-30 percent rate increase across accountant practices. Significantly higher increases and far limited appetite exist for practices involved in the audit of listed companies or financial institutions, business valuations, mergers and acquisitions work and those with existing and or open claims. Claims are emerging as regards COVID-19 issues (failure to advise on government incentives, etc).
Limited insurer appetite exists for financial advisers’ professional indemnity insurance. This profession requires drastic measures to ensure coverage remains adequate, appropriate and affordable. Industry peak bodies and Government have taken steps to strategise a balance between consumer protection, industry regulation and risk transfer (via insurance and implementation of perhaps alternative risk transfer or a ‘scheme of last resort’).
Exclusions for crypto currency are being applied. Excess structures are generally increasing and ‘each and every claimant’ retentions are becoming common. The Australian Financial Complaints Authority (“AFCA”) has exacerbated claims costs for insurers. AFCA states that in the last 6 months it received 32,263 complaints, with 60% of these being resolved, 74% of those resolved were done so in favour of the complainant of which $83m had been obtained in settlements. Significant defence costs are required to resist claims brought in AFCA’s jurisdiction. Insurers (and policyholders with large excesses) generally bear the cost of defence.
Investment and fund managers
Funds that comprise retail investors have limited access to the insurance market. Where underlying investments include development, mortgage, residential property or agriculture there is very limited appetite.
There remains broader insurer appetite for schemes comprising sophisticated wholesale investors into direct property, equities and private equity investments. Emerging investment funds in carbon, fintech and crypto currency have presented placement challenges: for the latter there is limited insurance appetite; that said rumours are emerging that 2022 will see a new market entrant focussed on crypto funds. Market education continues across digital assets.
“Licensees for hire” remain difficult to place, particularly where their corporate authorised representatives (CARs) have varying types of underlying assets. Where the CAR’s have retail investors there is very limited appetite. The most affordable way to have coverage placed in current market conditions is to aggregate limits across the licensees and representative – which will present issues in the event of a claim.
Some licensees and their funds remain uninsurable and there are uplifts of between 30 and 250 per cent across the class and in some instances a trebling of excess. This again will depend on nature of investments and asset classes.
Those most impacted by limited insurer appetite presently include:
- Building Certifiers
- Geotechnical Engineers
- On-shore Marine Engineers
- Structural Engineers
We are experiencing an uplift in premiums between 30-300%. Practices with claims history (in particular open claims), and those that undertake work on “complex” or “non-preferred” asset classes (for instance high rise residential, bridges, tunnels, dams, sea walls, jetties etc) are experiencing uplifts at the upper end.
Across the board, principals are insisting on more onerous terms in their contracts. Insurers are not offering coverage to align with said contractual requirements so there are significant commercial liabilities design professionals are being asked to assume. Principals’ commercial lawyers are unwilling to negotiate on the breadth of these contractual obligations, even if assuming same in fact prejudice 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”.
Developers (principal controlled professional indemnity)
Market appetite is limited. There are five traditional insurers that will look to participate on a primary basis. Capacity has been cut significantly, and in particular, extensions (such as mitigation of loss) are being sub-limited or not offered at all.
There are issues with many insurer wordings relating to common project structures that now exist. For instance, where the principal (owner, in part or in whole and particularly through an investment entity) has project design or management obligations through a separate special purpose vehicle (“SPV”) in which it too is the beneficial owner. Insurer will exclude claims brought by that investment vehicle by the SPV. The insurance cover held by the SPV will exclude claims brought by “related entities”. Hence the indemnity given by the SPV to the investment entity will be excluded, and the requirement to purchase professional indemnity to transfer the risk of such contractual undertaking (to indemnify the investment entity) has no efficacy. This is an ongoing issue and owners (particularly funds or SPVs that comprise investments from project participants) really need to check the “related claims” provisions in their policies. We are only aware of four insures who offer adequate carve backs to cover.
Design and construction contractors
Principals continue to insist on broad contractual liability carve-backs including but not limited to express fitness for purpose, assumed liability for the design of others, contracting out of proportionate liability and waiving rights of subrogation. Otherwise coverage is required to extend to principals’ and mitigation of loss is required to the policy limit.
Many of these carve-backs, readily available in a soft insurance market, are simply unobtainable now, or where they are offered the cost of same is prohibitive. Insurers preference is to move ‘negligence’ based wordings and apply exclusions as regards non-conforming building products.
Those engaged in projects involving residential apartment towers are experiencing a trebling of premium and excess. Those operating on such projects with claims history are experiencing even greater uplifts.
Insurers have sought to reduce capacity across the profession. Firms engaged in significant mergers and acquisitions, listing and prospectus advisory remain less favourable to insurers. Cyber exclusions have been applied on most top-up policies placed into the London Insurance market or underwritten locally via agencies with London “security”.
Recent commentary suggests rates are likely to stabilise, however, many are keeping an eye on current class actions where it is likely that liability is being offset to lawyers as “concurrent wrongdoers”. As boards rely more on their advisors to navigate the influx of ongoing regulatory change, lawyers will be key, and insurers are being cautious about liability that may sound in respect of same.
Ongoing concerns remain around COVID-19, insofar as remote working. Underwriters will have regard to a practice’s policies and procedures (particularly around workflow tracking and peer review), ongoing development of junior staff and quality assurance of work.
Limited market appetite exists. This remains the case notwithstanding the very limited claims activity against the class in recent times. Exclusions are onerous, particularly those undertaking development valuations. Rumours of the “property bubble” bursting have driven insurers away from the class further and that will continue to happen as the rumours escalate.
Insurers are concerned with the amount of lending happening outside the banks into the second-tier lending market. Again, this will sway any appetite against new entrants entering the market. It remains that this profession ought to consider taking proactive steps (like financial planners) to develop are more rigid, controlled and managed way to procure professional indemnity.
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