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IB Talk

The challenge for brokers post-COVID 19

In this episode of IBTalk, we chat with Manchester Underwriting on the difficulties brokers face buying professional indemnity cover that meets their own requirements and those of the FCA – all while the PI market hardens and COVID-19 issues continue to rise. Understand the challenges coming from regulation and the change in working practices post-COVID 19.

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Narrator: [00:00:05] Welcome to IB Talk, the leading podcast for the insurance industry across the UK and Ireland brought to you by insurance business.

Narrator 2: [00:00:14] This episode is presented in partnership with Manchester Underwriting. In the latest episode of IB UK Talk, Charles Manchester, CEO of Manchester Underwriting and Graeme Trudgill, executive director of BIBA, join us to discuss the recent difficulties brokers have faced buying professional indemnity and the challenges that are arising from regulation.

Mia: [00:00:44] Hello and welcome to the latest edition of IB Talk, the insurance industry podcast brought to you by Insurance Business. My name is Mia Wallace, senior news editor at Insurance Business UK, and I'm joined by Charles Manchester, CEO of Manchester Underwriting Management and Graeme Trudgill, executive director of the British Insurance Brokers Association, or BIBA. Many thanks to you both for joining me here today. So this podcast is going to be discussing the difficulties brokers have faced in buying professional indemnity cover that meets the requirements and those of the FCA, particularly during and post the COVID crisis. Which brings to mind a major topic of concern and debate during the COVID period, which was whether COVID 19 claims against brokers were going to sweep the markets. With the benefit of a little hindsight, was this a worst case scenario that didn't materialize? Let's start with you there, Charles.

Charles: [00:01:38] Well, I don't think we've got through the pandemic yet. It was the short answer, and I don't think the litigation has. Barely even begun. Other than the test case litigation, we've had quite a few notifications by brokers under their professional indemnity policies and a lot of these just don't look as though they're going to go somewhere. But we've had a number that are the beginnings of legal actions and that do involve meaningful amounts of money. Whether they will end up being successful or not, I don't know. But I think it's going to be a while yet before we can say that brokers are out of the woods, but certainly so far, so good as far as I can see.

Mia: [00:02:22] Fantastic. Thank you for that. And would you have anything to add to that, Graeme?

Graeme: [00:02:26] Yes, I don't think it's been as bad as many commentators predicted. We made sure we asked the Financial Ombudsman Service about the complaints levels that they'd received and they advised that only 3% of the BI complaints were actually made against brokers and less than 10% of the 3% were actually upheld against brokers. So that's no point of  0.3 of a percent. So we absolutely maintain our position that this was not a broking issue and we provided our members with a robust form of defense should they need it. As claims. Management companies will always try to look to make inroads where they can. And there's a six year window for them, of course, but we genuinely do not believe to be this to be a broking issue. And I think the stats so far support that.

Mia: [00:03:14] Well, it's definitely some very positive news there. Thanks for sharing that, Graeme. And looking across the market, it seems that brokers premiums have increased much more than other professions. I wonder, can you give me an overview of where brokers premiums stand as opposed to other sectors and why they're being penalised by having to pay so much for that PI, let alone adding in cover for COVID 19?

Graeme: [00:03:36] Well, I think that Charles would always tell me that brokers premiums were very, very low for many, many years, particularly when there was, you know, unrated capacity, passporting in from Europe. But from from our perspective, I think the increases in PI have affected all professions, particularly we see fire engineers, for example, who who need to do their work on surveys to get the cladding off the buildings, that there are high rise residential buildings that we're seeing lots of the difficulties with. You know, they're finding it difficult to get PI insurance at all. So I don't think the brokers have been treated any worse than any other professions. I think it's a particularly challenging time for everyone. But I'm sure Charles has a lot of insight to.

Charles: [00:04:23] Well, I think firstly, brokers pay substantially less even now than many other professions. I mean, I think Graeme has picked on probably the most difficult of all professions there with the fire engineers. But I think it's safe to say that cladding contractors, even surveyors and valuers are paying probably four or five times as much as insurance brokers in terms of rate, and so they're not being particularly picked on. What did happen with brokers, though, is that whereas other professions started to see increases in late 2018 and whilst their premiums between then and now have probably more than or their rates have more than doubled and in some cases trebled, I think insurance brokers didn't really see rates start to move materially until around the beginning of 2020. And the trigger probably was COVID, which the start of the pandemic panicked. A lot of the PI market and brokers then saw the 100%, 150%, 200% or even more in some cases rate rises happening overnight rather than over several years. And that certainly made them sit up. I think it was exacerbated by the fact that some brokers were dealing with insurers that were grossly underpricing the product. And so if they were moving from an insurer who had been grossly underpricing the product and pulled out of the market to one that has been consistently in the market and is pricing the product what they believe to be sustainably, then they're going to see really quite a massive increase. And I think that that's what a lot of brokers felt the pain from. And so I think it's more a case of how much pain they feel rather than necessarily how much, how much they were were. We're actually being charged.

Mia: [00:06:39] Well, it's certainly an interesting time to be in the market. And of course, the FCA test case and the more recent acts of court decision on COVID 19 have gone against insurers and appear to be leaving brokers somewhat in the clear. Does that mean brokers don't need COVID 19 cover?

Charles: [00:06:56] Well, I guess Graeme will have a view on this. The the FCA requires brokers to be insured for claims that may be made against them. If a broker can demonstrate that there is no possibility of a claim related to COVID arising under their professional indemnity, there's certainly they can they can probably get away without it. I mean, from my perspective. But I've been a broker. I've built businesses and you put years and years and years of hard work into building your business. You buy professional indemnity insurance not just to protect your customers, but to protect yourself if things go wrong. And why you would even think of buying a policy that would essentially not respond to one of the biggest potential problems that the market has ever seen is beyond me. And so not only is there a regulatory imperative that people should buy the cover unless they absolutely don't have any exposure, but it's just common sense as well. But I imagine Graeme would have a view on that.

Graeme: [00:08:07] Yeah, well, first of all, I think a big well done set to you Charles and the insurer CGPA that you often use who from the offset we're going to provide covered cover when not everybody did under the broker's PI so well done for that. I think BIBA's position is to say to members that buy as much PI cover as possible, buy as much as you can, afford as much protection as Charles says, it's not just to protect your customer, it's protect you as well. As far as the FCA goes, there's kind of three angles to it. So if you look at my my pre 3.2, which is I think what Charles just touched on, they say that firms must make provision for cover in respect of a claim for which a firm may be liable. So may be liable is that key phrase as a result of the conduct of itself, its employees and its appointed representatives. But the FCA also go on to say that providers, the actual insurers should give, should it so it should consider whether exclusions are consistent with their product governance obligations, including under prod 4.2, whether the product is actually compatible with the needs and characteristics and objectives of the target market. And then they also go on to say that firms distributing the professional indemnity insurance will need to meet ICOB's requirements. So this includes a need to consider whether an exclusion is consistent with the needs of their customer under ICOB's 5.2. So I think our point is if a broker does come to the conclusion that they don't need the cover, then it would be prudent for them to document that. Why they think that is the case, why if they satisfies themselves that they're not exposed and so don't need the cover.

Mia: [00:09:48] Some really great advice from both of you there. Thank you very much. And COVID has understandably taken up a lot of time and focus in the last two years. And I can imagine that remains one of the key dangers for brokers going forward. But including that, can you outline some of the key challenges that you've seen facing brokers in the market today?

Graeme: [00:10:07] But one of the key challenges in the BIBA manifesto this year is the is the risk of underinsurance. And we did some work with the charter's insurance charter. Sorry, the Chartered Institute of Loss Adjusters CILA to look at the latest levels of underinsurance in the UK, and they advised that underinsurance was evident in 40 to 45% of claims and that the degree of underinsurance there typically varied by around 35 to 40%. And of course, that, combined with a sharp increase in inflation, means that repair costs could be higher. Getting materials, it's taking longer. It's more expensive. Labour is becoming more expensive. So it's certainly one of the issues that a broker needs to consider. When you're with your clients at renewal, make sure you review that some insured to avoid the underinsurance exposures and any particular risks for for the for the broker. But I'm sure Charles has some good points to.

Charles: [00:11:05] I think Graeme has hit the nail on the head with underinsurance where we certainly with the recent storms we saw a flurry of underinsurance claims against brokers. Claims arise against brokers, generally speaking, when a customer doesn't get what they expect from the insurance. In other words, normally in general insurance it doesn't pay or it doesn't pay as much as they expect. And underinsurance is something that is easy to do because all you need to do is not review your sums insured for a period. It's not even that simple because particularly for things such as business interruption, calculating the sum insured may seem simple, but actually it does require expertise and even brokers can get that wrong. And so with the recent storms after that, we saw a flurry of claims against brokers arising from underinsurance. In one case, it was as much as 80%. And I think it's easy to achieve under insurance either by not reviewing sums insured regularly. And here brokers need to not just put it in their small print of a renewal notice, but they need to actually make it blindingly obvious to customers, which is probably one of the two most frequent causes of claim against broker that they must review their sums insured. But the second thing is with business interruption claims. Calculating the sum insured isn't as simple as looking at your turnover or anything like that. Brokers need to put in their professional expertise to explain how the insurance market reviews that will looks at sums insured in these areas. And and I think where brokers don't do that and don't do it as a in writing and be quite bluntly with their customers. And that's where you tend to see the problems arising. I think the other thing that arises that makes me lie awake at night, probably more than anything, is the problem with large sums insured on property insurance. This is where you get the total loss claims and it's this that that when you get a £10 million claim against the broker and there are £10 million claims against brokers, then that's what pushes some insurers out of the market. It's what creates a problem for the broker existentially, potentially, is that the first thing that happens with a large sum insured, large loss on a high sum insured, for example, a fire claim is that the insurer looks, they claw, they crawl all over it looking for ways of identifying, a way of not paying the claim. And should they find one, then very often the client is going to say to the broker, Why didn't you tell me? Why didn't you tell me that there was this warranty? Why didn't you tell me there was this condition precedent or whatever? And although the broker may say, Well, it was in the policy, I did tell you to read it. That's not necessarily going to be enough depending on the the level of expertise that you might expect of the customer. And many customers, even with large property sums insured, aren't that experts of insurance. And simply telling someone to to read their policy will very often not cut it in front of a judge. And so those are the two things that that really need to be spelled out to to customers is firstly reviewing sums insured, getting them right, particularly for business interruption. And secondly, I think the the property insurances is to explain and also other insurances, but to particularly explain the implications of warranties and conditions and what customers need to do.

Mia: [00:15:07] Well, there's certainly a lot of food for thought there, and I know that this is an area you're particularly passionate about, Graeme, but it seems to me that it's impossible to have a discussion like this without really digging into the regulatory PIce as well. And how are Manchester Underwriting Management and BIBA seeing the changing regulatory world impact brokers?

Graeme: [00:15:27] Well, regulation is a massive theme for our manifesto this year. There are so many new things coming out of the regulator all of the time. It's very difficult for your average small broker to keep up with it all and stay on top of it all. But I think in regards to PI exposures, I do feel that regulation should be a force for good because good balance regulation can have a positive effect through things like the senior managers, regime training and competence. So staff are doing those professional things that they need to do. They're doing all of the prudent kind of checklists and things that regulation kind of brings in. So ultimately, regulation should raise standards, and if standards are higher, that should mean fewer errors and emissions, which means fewer PI claims. But of course, I'm sure that members will be the first to say how regulation is affecting things like innovation and time supporting their customers and just the time taken on regulation is incredibly challenging for them. I guess our concerns are where regulation potentially brings in new exposures. So things like the consumer duty we were talking to Charles about Charles, he may want to elaborate on that.

Charles: [00:16:44] But if you compare the quality of the work that brokers do in 2022 compared to when I started my career in 1982, it's just a million miles better. And this hasn't been brought about by self regulation. It's not been brought about by individual firms, some of whom are fabulous. It's been brought about by external regulation, by government regulation, and it's made brokers better. Whether it makes them better risks from a PI perspective as the market gets more litigious anyway, I don't know. But I think that some of the things that used to go on in the eighties and nineties are thankfully consigned to the past, the consumer duty. Every time something comes along. I think everybody and the lawyers always foresee doom and gloom and the Four Horsemen of the Apocalypse just over the horizon. But the reality is that rarely have regulatory actions like this. The sudden sea change in the incidence of claims. There was talk that the Insurance Act would lead to a lot of that and it didn't really. I think generally speaking, people. They're obliged to. And so they do embrace regulatory change and and they do what they need to do. And so I think it's unlikely to cause a major issue for the market. As I said in the earlier point, I think that the things that. Brokers need to worry about, or oddly enough, the same old things that they needed to worry about ten years ago and 20 years ago. And it's recording. The stuff that they do in writing is telling customers, explaining customers, not assuming that they know what they're doing with insurance, but explaining what they need to do is what brokers are paid for at the end of the day is to give advice. And the areas that caused the biggest issue aren't regulatory changes or anything like that. They're the basics and the very basic things reviewing sums insured and explaining the complexities of insurance to your customer and then confirming it in writing and those two things. If you can get those rights, then you're going to be way, way ahead of the pack in terms of keeping out of trouble.

Mia: [00:19:16] You're absolutely right. That certainly seems to be a case of getting those basics right at the beginning. But given the complexities of the markets, what does a PI policy for brokers need to do from your perspective?

Charles: [00:19:28] Well, I think it's not just what is a policy needs to do. Most policy is more or less 80, 90% of them are more or less the same. There are some some extras, but whether they are needed is another thing. But there are certainly some extras. I mean, for example, the FCA requires that insurance be insured, should not exclude the insolvency of insurance, but many policies do. Likewise, I think it's not so much what's in the wording, it's the key things of the PI insurer for me, and it certainly used to worry me when I was a broker. Arranging for insurances is what is the not just the financial rating of the insurer, but what is their willingness to pay claims when a claim arises, whether it's PI or come to that, any other line of business do they say that's what we're here for? We'll pay that claim? Or do they say, Hmm, are you sure you notified that in time? Are you sure that you we can't find a way out of this claim? And the other thing is, how long have they been around? Because we're broker's PI, because it's so easy to get it wrong. You can write it with a relatively modest amount of the premium income for two or three years before you encounter the large loss, because these large £10 million claims, they're not very common. But I can tell you when they arise, they don't offer it. And where it's an insurer that is running at sort of 70% loss ratio, net loss ratio on their attritional business and they think they're making money. And then along comes the seven figure claim and all of a sudden it wipes out all the profit they've made in the previous three or four years. Then they pull out of the market. And so you do get insurance coming and going quite regularly with PI for brokers, because brokers more than any have these this large loss and the other profession have this large loss potential. And so I think the other question to ask an insurer is how long have you been writing brokers PI? And in CGPA's cases I mentioned earlier as one of our main backers, they've been writing it for almost a hundred years and that's all they do. And so these questions is not just what should it be policy do, it should do yes, it should cover COVID. Yes, it should cover insolvency of insurance or not exclude COVID or not exclude insolvency insurance. But you should also look at the attitude of the insurer there and whether they are going to be willing to pay these large claims or deal with them and whether how long they've been in the game. Over to you Graeme.

Graeme: [00:22:13] Thanks, Charles. Well, BIBA has taken brokers by really seriously. So much so that back in 2004, we started a professional indemnity insurance initiative for brokers. So we've put out a series of guides. I think we have six guides covering all sorts of things from sort of a basic introductory to PI, guides for staff, guides on risk management, specific guides and under insurance. So all sorts of support there. But also we looked at what was the ideal policy wording and then we've got three accredited PI brokers, of which Charles is one to support members in providing them policies that are suitable for their specific needs so that we can have that comfort that when it does come to that, that that claim, which hopefully won't happen, but will happen on occasion, they will take the first approach that Charles mentioned, that we're here to help you pay that claim. And ultimately it's for us, it's about brokers getting covers suitable for their needs. And that differs from, as you can imagine, a personalised motor broker to a big by commercial broker. So so yeah, have a look at the, the BIBA Professional Indemnity Insurance Initiative and there's lots of resource there to help you.

Charles: [00:23:28] I think as well. The other thing that we do is we don't just see this as our role to pay claims, but it's our role to defend the broker. And in an ideal world, that would start with keeping them out of the firing line in the first place. And so so we provide a service to to our insurance where they when they feel that there is a vulnerability, there's something going on they're not happy with, it may not even lead to a claim against them. Say, for example, an insurer there's a sizeable loss of an insurer reserves their rights, but that's always when an insurer reserves their rights under claim. That's always a bit of a worry and we provide legal support for them at this point when they speak to a lawyer and I don't just mean the helpline, they actually get proper help from a qualified lawyer drafting letters, trying to persuade or emails, trying to persuade insurers not to preserve rights and to provide indemnity. And if they can be successful there before the insurer is entrenched and in some sort of litigation scenario, if they can get the insurer onside at that point, then they can avoid the possibility of a claim arising against them in the first place because at the end of the day, the best result is if the customer's claim is paid and so so we'll do it there and that won't affect their claims record. That's part of the service. Obviously, if a claim is later made against them, well, then we'll deal with that as well. But we we want to head these things off of the past and avoid having a claim in the first place. If that can't be done, then we are there to look after them and defend them and hopefully keep them away from liability.

Mia: [00:25:12] And that's great to hear about that very proactive and reactive response. And it's also very clear that Manchester underwriting management and BIBA have a real wealth of experience and helping brokers navigate this landscape. And I wondered if you could tell me the best way to get in touch for brokers who are looking to find out more about the PI space.

Graeme: [00:25:33] From our perspective, come to biba.org.uk or give the BIBA team a call and there's a section on our website in the members section called the Brokers Professional Indemnity Insurance Initiative. And it's, as I say, a wealth of information guides and then links to the accredited brokers like Charles, who can then, you know, guide you on on that journey and help you find a cover that you need.

Charles: [00:25:58] From our perspective, I've just come to manchesterunderwriting.com and or speak to anybody at Manchester underwriting and they'll look after you.

Mia: [00:26:06] Fantastic and slightly off the beaten track of this conversation. But while I'm here in the company of two industry stalwarts who both had remarkable careers. I must ask if you were starting over in the broking sphere today, what are the key things that you would do or do differently?

Graeme: [00:26:24] Well, from our perspective, I think the first thing is clearly to join your friendly trade association. So sign up with sign up with BIBA. But there are so many things to do. I mean, we actually have an insurance broker standards committee and that committee has a good practice guide and that good practice guide has a whole chapter on it about starting an insurance broker. So in there there's all the things that you need to think about. So whether that's creating your articles of association to doing a business plan, sorting your tubers and your staff sales scripts and template letters or your complaints procedure, there's, as I say, a whole list of things. But if it's specifically about how do you keep your PI exposures to a minimum in your new broker that you've started? It's I think the things that having a checklist. So make sure your staff are doing all the things remembering to put that person on cover, all the things they're supposed to do, and pointing out that question about when did you last over your sum insured, those kinds of points. But also, you know, there will be allegations of errors and omissions. So core recordings is a really good thing, a really good practice to to implement if you can. It's a lot easier these days so you can evidence if it ever came to court that you did advise the client of the particular issue and always document that activity as much as possible. It can all be used in your defense if you need it. And I'll probably say that old fashioned thing of peer review, you know, we still do that here at BIBA. Someone drafts a press release and gives it to someone else who will do a read out loud check, as we call it, to make sure that it makes sense. There's no errors and we can all be comfortable that what we're putting out is going to be helpful for people. So so yeah, there's a lot of resource on, on the BIBA website under our Insurance Brokers Standards Committee.

Charles: [00:28:18] Yeah. Well having joined BIBA, I think the other thing that I would do is probably record all my phone calls and you can get apps these days that can even do it where they're mobile phone calls and transferred in and record everything you do confirm everything in writing. And I think that the key thing is really obviously the sums insured and the warranties and the conditions, precedent, etc., that I mentioned earlier. But I think that's part and parcel of being a broker. But I think the key things starting as a broker today and I would do it is that.

Mia: [00:29:01] That's a lot of really great advice there from both of you. And I must say, I've really appreciated your insights, your expertise and your company today. It's been a real pleasure. Thank you so much.

Graeme: [00:29:12] Thank you.

Charles: [00:29:13] Okay, thank you. Bye bye.

Mia: [00:29:15] And for everybody listening, many thanks for joining us and I look forward to welcoming you back next time on IB Talk.

Narrator 2: [00:29:23] Thank you for listening to this episode of IBUK Talk. For more from the team at Manchester Underwriting, visit them at manchesterunderwriting.com Thank you for listening to IBUK Talk the latest episodes. Be sure to follow us on SoundCloud, Stitcher and Apple Podcasts.