This article summarises issues involved with the Professional Indemnity insurance market and the hard/soft cycle that has such an influential effect on premium levels. We will also attempt to predict what the future might hold as the market moves inexorably out of its soft phase and into harder times. Where are we now - and the future?
The Professional Indemnity (PI) market is currently in its soft phase, with insurers still placing emphasis on volume at the expense of profit.
And what of the future? It is certain that at some stage the market will enter harder conditions. There is uncertainty as to when the market might harden and by how much. Invariably the deeper and more prolonged the soft market the more pronounced the adjustment will be when it comes.
Events in insurance, as in life, are powerful and unpredictable. What future events might conspire, individually or collectively, to prompt a return to harder market conditions? The following is a list, by no means exhaustive, of the likely culprits:-
1) The Credit Crunch - will have three adverse effects on the insurance market. First, there is likely to be an increase in the cost of capital as its availability becomes scarce. Second, a reduction in the asset base of major insurers as sub-prime losses erode balance sheets – further reducing the capital available required to underwrite risks. Third, an increase in credit crunch liability claims as those who have suffered losses (home owners, shareholders etc) seek to recover from professional advisers, company directors etc.
2) Investment Income - a combination of increased stock market volatility and reducing interest rates could see insurer's ability to generate investment income curtailed.
3) Environmental Factors - after two relatively benign years of (insured) natural catastrophes, could 2008 see a return to more usual levels of claim - particularly in relation to the hurricane season?
4) Economic Factors - a downturn in the economy hits the insurance industry in two ways - invariably an increase in the cost of claims allied to a reduced pool of economic activity from which to collect premiums.
And finally - unforeseen events aside, our current prediction is that whilst the market is unlikely to harden during 2008, prices could well start to rise towards the start of 2009.
As ever, forewarned is, or should be, forearmed...
Griffiths & Armour Professional Risks acts as manager for the professional indemnity division of Griffiths & Armour.
Griffiths & Armour Professional Risks Ltd is an appointed representative of Griffiths & Armour which is authorised and regulated by the Financial Services Authority.
All rights reserved. This document does not present a complete or comprehensive statement of fact or the law, nor does it constitute legal advice. It is intended only to highlight issues that might be of interest to Griffiths & Armour clients; specialist legal advice may be required where appropriate. Where links to third party websites are provided, we accept no responsibility for their content.
About the Author:
Paul Berg is the owner of Griffiths & Armour, UK's leading independent indemnity insurance brokers, risk managers and financial advisers. We specialise in professional indemnity insurance and professional liability insurance for the construction and legal professions.
