In this article, Clear Insurance Management Ltd provide an overview of the state of the market in Q4 2020 for QCA member companies:
What is the current state of the overall financial lines market in the UK?
Financial Lines covers a broad range of policies including Directors & Officers (D&O), Professional Indemnity (PI), Crime and Cyber. Rates of premium for all these classes have increased on a quarter by quarter basis since late 2018 and this rate hardening has accelerated over the past 12 months.
Since the COVID pandemic impacted the world economy in March, many Underwriters have effectively ‘pulled down the shutters’ for new business, some are declining to renewal policies and others are leaving the sector altogether. This has resulted in a huge increase in premiums, normally well over 40% and increasingly over 100% if rises in the preceding quarters are taken into consideration. In addition, many insurers have withdrawn their capacity from Managing General Agents (which are companies that quote on behalf of insurers) which is further limiting choices for clients.
For clients who are used to seeing year on year rate reductions and a freely accessible market these increases are a cause for concern and make budgeting extremely difficult. In the D&O sector we are now seeing instances of clients being unable to source cover without very punitive exclusions (such as insolvency exclusions) or in some cases not being able to obtain cover at all.
What are the reasons for the hardening market?
There are many factors that play a part in the pricing increase, not least that both PI and D&O pricing has been very low for a considerable length of time. Premiums have dropped consistently since 2003 and whilst 2019 saw modest rate rises recently rates have risen alarmingly. This long soft market had eroded insurers margins and a worsening claims position in recent years has resulted in a knee jerk reaction from many.
For many years insurers have enjoyed strong investment returns but with historically low interest rates these returns have evaporated. If you combine these issues with a gradually worsening claims position and major losses like Grenfell it is easy to understand why insurers need to increase their premiums. Pressure from regulators to correct unprofitable lines has also played a part.
On top of this, COVID, Brexit and the recession have created a toxic mix over recent weeks and the potential insolvency issues these bring are driving further negative sentiment within the Underwriting sector.
Aside from pricing are there other areas to watch out for?
In addition to pricing many insurers are undertaking reviews of the cover they provide either on a blanket basis or case by case depending on the type of risk.
On D&O policies, which are of particular concern for Quoted Companies, we were already seeing insurers applying insolvency exclusions on the occasional policy, but this has widened with many insurers applying the exclusion for whole economic sectors such as travel and hospitality. We are now also seeing insurers trying to apply specific COVID exclusions to D&O cover. Both of these severely limit coverage and if at all possible should be avoided.
Quoted companies are probably suffering more than most sectors as the market appetite for new business has almost disappeared. Should the incumbent insurer not offer renewal terms the resultant increases can be astronomical and, in the worse case scenario, it is possible cover cannot be found at all. This would have been almost unheard of a year ago. Other common changes which reduce protection are:
- Cover limits changing from an any one claim basis to an annual aggregate limit
- Large increases in excesses
- Reduction in the maximum limit insurers will provide
- The application of specific restriction in higher risk sectors such as Design and Construct/Care/Retail and Leisure
- Application of punitive exclusion language (such as Insolvency Exclusions and Absolute Bodily Injury & Property damage exclusions).
It is therefore key that renewal offers are carefully reviewed and any changes discussed in depth with your insurance advisors.
Our advice to clients in the run up to renewal
There are 3 key points here:
1. Start the renewal process early
In a hard market, you can’t wait until the last minute to secure cover (let alone high quality cover). With this in mind, be sure to engage with your adviser in the renewal process as early as possible as there is no such thing as a straightforward renewal at present. Doing so will give you plenty of time to gather any documentation and information required for renewal. In addition, insurers will likely ask more questions than usual before finalising your policy, making it even more vital to get a head start on the process.
2. Invest time and effort in your presentation
The few insurers willing to look at new risks will concentrate on those where they have good presentations that are clear and contain all the relevant information. A Clear concise proposal form is imperative to ensure your business is portrayed in the best possible light and we would recommend that a commentary on business resilience to COVID (both in terms of financials and systems) is provided even if not requested by your current provider.
3. Carefully check the small print
Beware the detail. In our experience many brokers have not been highlighting dangerous exclusions and terms applied at renewal or explaining the implications of them. Key ones to watch out for are:
- Absolute bodily injury & property damage exclusion
- Insolvency Exclusion
- Absolute COVID Exclusion
- Amended definition of transaction
- Removal of Discovery
Your broker should be highlighting and explaining any additional endorsements or exclusions applied over and above the standard policy wording – if not, seek clarity from them.
Clear Insurance Management
We are here to help wherever we can and discuss what cover your company needs. Don’t leave it too late because with insurers reducing cover and increasing pricing you need time to find out what other options may be available to you. We have specialists who understand the market and know how to navigate it for you.
Directors & Officers
Tel: 0208 329 4928 or 07889 967 110
Tel: 0207 280 3457 or 07950 436319
Tel: 0207 280 3471 or 07710 437617
Professional Indemnity & Cyber
Tel: 0207 280 3479 or 0757 210 4029
General Corporate Insurance
Tel: 0208 329 4974