During the period 1998 to 2007, the U.K. Professional Indemnity (PI) market for all classes of professions returned an average gross loss ratio of 75.1 percent per annum. In 2008, this average loss ratio rose to 90.6 percent. When one factors in underwriters’ costs, this rise was sufficient to push many insurers into the red.
The key driver behind the market’s dramatic decline in profitability in 2008 was the sharp increase in claims costs brought about by a higher volume of claims than in previous years.
In light of this background, a number of years of relatively soft rates and concerns that the recession would lead to a rise in related claims, most commentators believed that premiums would increase in 2009. The reality was that PI premiums did not increase in the way that many had anticipated.
Despite a challenging environment, market rates remained relatively stable, particularly for those firms able to demonstrate good risk management and better than-average claims experience. Be that as it may, the U.K. PI market continues to trade through a particularly challenging period. Many professions are experiencing intense competition, and the recession has decreased company fee income and increased claims frequency. On this basis, the U.K. PI market is facing mounting losses and will remain challenging for insurers for some years to come.
The Next Five Years
There are a number of factors that will influence how the U.K. PI market evolves over this period.
The most important factor will be the abundance of capacity in the insurance market and, by extension, what competitive strategies insurers adopt. While some insurers have withdrawn from certain sectors of the market, most notably the smaller end of the solicitors market and the valuation market for surveyors, competition in the other sectors remains fierce, and there continues to be significant appetite among both new and established players for top-line growth.
Claims will also be a significant factor. More claims are expected against professionals because of the downturn in the property market, an increase in general negligence claims and fraud driven by the recession. This is expected to reduce profitability in the U.K. PI market this year and could well be the catalyst for a more broad-based hardening of rates towards 2013.
The recession itself is also likely to have a direct effect since the lower fee income of professionals is expected to depress the market for PI insurance. Many sectors have been hit hard by the recession, particularly those associated with the property sector (e.g., surveyors involved in property valuations for mortgages, solicitors with significant conveyancing exposure, estate agents, and construction firms or contractors) and this reduction in economic activity will almost certainly have a knock on effect.
Source: Datamonitor, UK Professional Indemnity Insurance 2009, 11/2009.
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market update.
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