Morrison insurance Solutions

Key issues in a hard market for Financial Lines


What is the current state of the 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 of 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 renewals and others are leaving the sector altogether. This has resulted in a huge increase in premiums, frequently well over 40% and on occasion 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 In addition, many insurers have withdrawn their capacity from managing general agents (which are companies that quote on behalf of insurers) which is further limiting choices.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 who are used to seeing year on year rate reductions these increases are a cause for concern and make budgeting extremely difficult.

What are the reasons for the hardening market?
There are many factors that play a part in the pricing increase:

  • bullet-arrow-indent.gifBoth 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;
  • bullet-arrow-indent.gifFor 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;
  • bullet-arrow-indent.gifOn top of this, the uncertainty surrounding Covid, Brexit and the recession have created a toxic mix 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, for example, 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 severely limit coverage and if at all possible, should be avoided.

In the Professional Indemnity sector, because of increased frequency and severity of claims, many insurers are scaling back on the wording enhancements that have been included in policies over the past 20 years. This can include reducing cover from a ‘full’ civil liability basis to negligence only policies which can influence historic contractual arrangements.

Other common changes which reduce protection are:

  • bullet-arrow-indent.gifCover limits changing from an any one claim basis to an annual aggregate limit
  • bullet-arrow-indent.gifLarge increases in excesses
  • bullet-arrow-indent.gifDefence costs being included within the overall limit (as opposed to them being provided in addition)
  • bullet-arrow-indent.gifReduction in the maximum limit insurers will provide
  • bullet-arrow-indent.gifThe application of specific restriction in higher risk sectors such as Design and Construct/Care/Retail and Leisure.
  • bullet-arrow-indent.gifIt is therefore key that renewal offers are carefully reviewed, and any changes discussed in depth.

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). Be sure to engage with your adviser in the renewal process as early as possible, as the renewal process is not straightforward 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. From the basics of ensuring that income splits add up to 100% through to including accurate risk management and control information, it is imperative your business is portrayed in the best possible light in order to get the best terms from insurers.

3. Carefully check the small print

Beware of the detail. In our experience, many brokers have not been highlighting dangerous exclusions and terms applied at renewal or explaining the implications of them. The key ones to watch out for are:

  • bullet-arrow-indent.gifAbsolute bodily injury & property damage exclusion
  • bullet-arrow-indent.gifInsolvency exclusion
  • bullet-arrow-indent.gifAbsolute Covid exclusion
  • bullet-arrow-indent.gifAmended definition of transaction
  • bullet-arrow-indent.gifRemoval of Discovery
  • bullet-arrow-indent.gifYour 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.

Talk to us!
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.

If you have an enquiry or would like further guidance, please contact one of our specialists.

01789 761 670

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