Taking cover

Obtaining insurance cover for professional indemnity, directors’ and officers’ and cyber risk has become fraught with higher costs and frustration – and Channel Islands businesses are feeling the impact. But just how big a problem is it? and what can firms do to protect themselves?

Professional indemnity insurance might not sound like the most enthralling of topics, but for many professions it’s an essential requirement to practise and must be purchased by individuals or the firms they work for. Without it they cannot operate. It is, as they say, non-negotiable. 

However, rates are rising, and some sectors are being impacted more than others. Construction and its associated professions, such as architects and fire surveyors – which have been particularly hard hit by the Grenfell fire disaster – is a good example. 

An avalanche of regulation has also been a factor in areas such as audit, insolvency, probate and investment business, where high levels of PII cover are often mandatory. 

Premium rates are also rising for directors’ and officers’ (D&O) cover, where insurance is provided for the actions of directors, officers and the businesses they work for. The availability of cover is being staunched, while the scope of coverage is being restricted and premiums have risen.

Cyber is another area where cover was once a ‘nice-to-have’ but is now vital.

These rate rises are the consequence of a hard market where, put simply, insurers are less willing to insure. It wasn’t always like this but, since the financial crisis, insurers have found it less and less easy to turn a profit – while claims have become more frequent. 

To make things worse, in May 2018, Lloyd’s of London, the specialist insurance market where cover is bought and sold, conducted a performance review dubbed Decile 10.

It required managing agents in eight classes of insurance, including non-US professional, to come up with a performance plan to return the worst-performing 10% of premium for each insurance syndicate to profitability or cease doing business. The effect was to withdraw capacity from an already straitened market. 

Not just a blip 

What’s worse is that some, such as UK risk management trade association AIRMIC, fear that this hard market may not just be a cyclical blip. It describes it as a “harsh market”. 

AIRMIC Technical Director and Deputy CEO Julia Graham says: “Previous hard markets have typically seen cyclical peaks and troughs in pricing.

But this harsh market includes limitations in cover available (capacity and deductibles) and scope of cover; some sectors facing a smaller choice of carriers prepared to underwrite cover; requests for client information that appear unfounded; and decisions being taken at a headquarters level rather than at a local underwriter level. 

“Couple this with poor timing and communication of decisions,” continues Graham, “and the mix is now quite different. It forms the basis of a fundamental shift in trust between provider and customer, and a seismic change in the values and behaviour of some in the market.”   

In this landscape, insurance brokers are operating between clients that need help sourcing the cover to be able to operate and insurers that are less and less willing to provide it. 

The broker view

So what would the brokers themselves advise? Lee Refault, Group Business Development Director at Jersey-based Rossborough Insurance – part of global broker Arthur J Gallagher & Co – and his colleague David Rogers, Executive Director Financial and Professional Risks at Gallagher in London, have a clear view.

“The most important thing that clients can do for themselves is to start the renewal process early,” says Refault. “Really invest time and effort into putting a good presentation into the market. 

“There’s nothing worse than seeing a hastily completed proposal form in scrawled handwriting, where the numbers just don’t add up. 

“In a market where insurers don’t need to write new business because they’re making money on their renewal book, on which they’re also going to be very selective, when the insurer has a pile of quotes to work through, it’s the badly prepared ones that get put to one side.”

David Rogers echoes this. “You’ve got to start early. A broker says: ‘This is the timetable we’re going to work to; these are the markets we’re going to talk to’. We brokers take a targeted approach to markets and use our knowledge of the market to make the process efficient and effective.”

He continues: “There should also be a plan B. If things don’t work to plan or if your lead insurer simply says: ‘I’m sorry but your business is not what we’re going to write this year because we’ve made a corporate decision’, there should be an alternative plan in place, before that happens, and that should cover which insurers you’re going to talk to for an alternative.

"If you have all that stuff laid out, all that work done in advance, you lessen the chance of an unpleasant surprise at the end.” 
 
AIRMIC’s Julia Graham points out: “There is evidence that, in the face of increased costs and difficulties in obtaining cover, some larger businesses are turning to self-insuring – including through Guernsey-based vehicles.” 

That’s where businesses set aside premiums in their own captive insurance company, building up sufficient capital to be able to meet future claims. 

“Captives have long been a solution for PII and they are increasingly being considered for D&O,” Graham adds.

Increase in enquiries

Mike Johns, Chairman of the Guernsey International Insurance Institute and a Director at Willis Towers Watson Management (Guernsey), says insurance managers across the island are reporting an increase in enquiries for captives. 

“This has been constant through Covid-19,” he says. “The Guernsey Financial Services Commission has also seen an increase in submissions. 

“Enquiries are being received not just in relation to professional risks but all areas of insurance, because there appears to be a hardening in rates across the board. The enquiries are also coming from locations all around the world, so it’s not just a localised issue in the UK.”

Although using a captive may be seen as a big company insurance solution, Johns says that while smaller insurance vehicles will need to have sufficient premium to justify a self-insurance route, they may be able to use a protected cell rather than a full captive.

For businesses in the islands looking to obtain certain classes of business insurance, the current hard market is a challenge. And it’s a global phenomenon. 

But there are weapons that insureds and their insurance brokers have in their armoury – and the better prepared they are, the more likely they can source the cover they need. Even if premium rates are likely to be higher than in previous years.