Under the current insurance market conditions, it is becoming increasingly common for engineers to find their Professional Indemnity (PI) Insurance cover has altered in some way at renewal. These may come in the form of reduced limits of cover, increased excesses, coverage exclusions or special conditions of cover.
Below we explain the reasons behind this, and some things you can do to assist in achieving the best available insurance coverage for your business.
What coverage changes are engineers encountering when receiving renewal documentation from their PI Insurer?
It is becoming increasingly common to see the following PI coverage changes at renewal:
- Reduced PI Insurance Sums Insured e.g. an insurer may only offer cover up to a certain amount. If higher sums insured are needed, a co-insurer arrangement may need to be explored, where two different insurance
companies share the risk. - Cover exclusions e.g. building cladding coverage exclusions, refusal to cover certain business activities under the policy.
- Excess (deductible) increases in respect of Claims.
- Special coverage conditions e.g. certain risk management measures must be implemented before coverage will be offered.
- Renewal invitation not offered – this is worst case scenario, where the insurer cannot offer renewal for the policy. This may be for a variety of reasons e.g. poor claims history, the insurer has changed their risk appetite, the insurer has reduced financial capacity, the engineer has added new higher risk business activities that sit outside the insurers risk appetite.
companies share the risk.At present coverage changes are also often accompanied by renewal premium increases. In general, we are witnessing the following:
- A 20% increase in premium in the absence of any changes to the insured risk.
- For high risk occupations, substantial rate increases of over 50%. In particular this applies to design and construction, which has unfortunately seen a sustained history of large claims.
How is the insurance market affecting PI coverage changes?
Australian and overseas insurance markets are experiencing hard market conditions.
What does this mean?
Over a sustained period, insurance companies have been experiencing high loss ratios, where claim payments to clients exceed the premiums collected. Under pressure to recoup their financial losses, and to ensure ongoing sustainability in order to continue to pay claims, insurers must increase premiums and apply tighter policy conditions e.g. higher excesses, more cover exclusions, and restrictions on the risks they are willing to cover.
We are witnessing these conditions across the majority of insurance policies, with some more affected than others. When it comes to PI Insurance, the hard market has predominantly affected engineers classified by insurers as at a ‘higher risk’ of suffering claims. However this trend is now also affecting all risk categories.
What is causing the hard market?
- Claims are occurring at greater frequency and a greater cost to the insurer. This can mainly be attributed to the trend of social inflation where litigation is occurring more often, and decisions are weighted towards plaintiffs, with higher compensation payments.
- A low interest rate environment which makes it difficult for insurers to achieve strong investment returns to offset poor claims loss ratios.
- The COVID-19 pandemic, which has served to complicate the insurance market further to the above, with insurers becoming more risk averse and selective in what they choose to cover, avoiding unnecessary financial exposures in fragile economies.
Why do changes to cover occur?
Each year at renewal, your PI Insurance policy is reviewed / re-underwritten and is subject to change by the insurer. Insurance companies are entitled to make policy changes for a whole host of reasons. They may change policy conditions, increase premiums and deductibles, and they are in no way obligated to invite renewal each year. What happens to your coverage is at the insurer’s discretion.
Policy changes may occur without notices for some of the following reasons:
- A change in your risk / business activities
- An element of your business activities may have changed over the course of the year, e.g. a new service offered to clients, or you may have entered into larger contracts with different limits of liability.
- When this occurs, the insurer will reassess your risk and may change your policy coverage according to the changes in risk in your business. I.e. if you represent a greater risk of claim occurring, or claims are likely to be larger in cost, the insurer may increase deductibles, or limit your sums insured below what you require for your new level of exposure.
- An insurer has changed the underwriting guidelines or ‘risk appetites’ they must adhere to
- Underwriting guidelines are a set of rules and requirements an insurer sets out, which guides decisions on what risks they can accept to insure, the excesses applicable, and what policy conditions can be offered.
- These guidelines, or changes to the guidelines, are what can cause changes in your renewal premium, cover conditions, excesses and whether or not you will be offered insurance at renewal.
- Changes in risk appetites are exacerbated at present by the hard insurance market conditions.
- Your claims history
- If your engineering business has an outstanding claim, an extensive claims history, or claim notifications, there is a chance your conditions of coverage may become stricter e.g. an insurer may require specific risk management measures to be implemented by your business before they will agree to offer coverage.
- This is done to help the insurer manage the likelihood of claims occurring, which can impact their financial viability and capability to pay claims.
- Industry claims trends
- Insurers may experience a large number of PI claims for a certain engineering discipline. This can negatively impact their claims ratio by reducing the premium pool, due to a high number of claims being paid, and subsequently, the financial viability of offering insurance to businesses within this engineering discipline.
- Based on claims trends, insurers may impose certain cover exclusions for policy sections that record a high number of claims, or cap the total sums insured they will offer. This helps ensure the insurer can afford to pay insurance claims without making a loss on their balance sheet.
- Market withdrawal as a result of poor financial performance
- PI insurers can withdraw from markets where the provision of insurance is not financially viable. Should this happen, an insurer would decline cover at renewal.
- Generally this occurs in markets where claims ratios far exceed the premium pool available, insurers are making a financial loss, and cannot continue to pay claims. Due to the increased frequency and cost of PI Insurance claims this is becoming a real problem.
What can you do to achieve the best possible result for your coverage in this situation?
A specialist PI Insurance broker can provide valuable assistance to achieve the best available insurance outcome for your engineering business.
An EngInsure insurance broker has access to a variety of markets not available to the general public, and our economies of scale aid us in negotiating the best available policy conditions for your business.
With extensive experience, our professional indemnity specialists have the knowledge and expertise to fulfil your risk protection requirements, compiling bespoke insurance solutions that align with your risk profile.
EngInsure are here to support you with important PI Insurance advice and solutions to reach the best possible outcome for your business. For assistance, please get in touch with one of our specialists:
T: 1300 854 251
E: info@enginsure.com.au
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.
