“I’ve spent 25 years working across almost all insurance products, in most places in the world, and gained a truly broad and diverse experience of insurance, but, for me, the PI market in the UK – from what I’ve seen and understood over the last 20 years – is an absolutely brilliant case study of how not to do it.”
In conversation with Insurance Business UK, Nic Brown (pictured), divisional director – broker at Markel UK, prefaced his overview of what’s happening in the professional indemnity (PI) insurance space with a ringing indictment of the wider market. It’s a sector distinguished, he said, by a handful of insurers that have been and will be in the market for a long time. These insurers understand that, when done right, this often contractually-required coverage provides efficacy for the entire business value chain.
“This is a coverage that every single small businesses in the UK is often contractually requested to have,” he said. “And when we look at what’s happened and what’s happening in this market, it is almost commoditised, with price as its only differentiator. We see prices getting pushed down year after year as insurers ultimately want to grow their portfolio in this space, and the only way they’re doing it is by releasing capacity.”
But that approach of just challenging the price points of the sector comes under pressure when, inevitably, challenges start to buffet the space – as seen in construction PI in the wake of Grenfell. As the price comes down, Brown said, the insurers who placed those bets look to manage the risk they’re exposed to by fiddling around with wordings, increasing exclusions, putting limitations on policies and trying to manage costs at the point of claim through loss adjusters.
So the pushing down of rates, and the introduction of lots of capacity and pricing competitiveness is reducing not just the price but also the competitiveness of this product. And the way that is managed by those insurers looking to navigate any peaks within the claims process is to layer in more limitations or complexity on the claim, he said, neither of which is good for the customer.
“The customer wants it cheaper,” Brown said, “and the reality is that the market responds and delivers them solutions that are sub-optimal… But the interesting piece for me is what has happened in the last few years, as people have pulled out of the market worried about layers of risk, new scenarios, the business interruption impact, discussions around inflation and the failure rates of businesses.
“[They] react to this by saying ‘well, we don’t want to do any more of this, we don’t really want to renew it so we’re going to push the price back up’. The market, in terms of this competition, then shrinks, and it’s left to a handful of insurers that have been here for a very long time to keep providing that certainty to this marketplace.”
As a result, he said, the prices go back up and there’s even a term for that – the hardening of the market. But as tempting as it is to talk about the market in terms of hard and soft conditions, it’s important to call this capacity fluctuation out for what it, he said – unsustainable pricing.
“And it’s got to change,” he said, “because I don’t think it’s right for the customer. I don’t think it provides that sustainability as a market. And there are a handful of insurers, and I include us in that category, that are trying to do things over the long term, trying to put the customer first and trying to make things sustainable. And we’ll do that, we’ll provide that clarity and that coverage, and it will enable us to provide wider solutions - if we give ourselves the right run at it.”
Short-term capacity focused on commoditisation around price isn’t going to help, Brown said, and more to the point, it will have long-term ramifications for the insurance market and customers alike. He, therefore, urged brokers to take the opportunity available right now to develop a really strong, long-term memory when it comes to PI coverage.
Remember the insurers who were there for you the last time capacity disappeared from the market and left you high and dry, unable to place risks, he advised. And when that capacity comes back into the market and uses price to gain market share, if you’re a broker who allows that to happen then you’re essentially adopting a strategy of earning less money for yourselves and creating less sustainability for your clients.
“You’ve worked really hard for the last two years to navigate through the really difficult situations which this unsustainable pricing causes,” he said. “And once you pop out of that turbulent air, you have the opportunity to keep flying at 30,000 feet, and manage that sustainability, and to put the insurer under more pressure to deliver better quality products to the customer and a better service to you and your customer.
“If you immediately go back to driving price down as the only differentiator and allowing anybody to write that business, you’re only ever going to be here for the short term… Brokers need to be more demanding in general [of their insurer partners] but we also need to work in tandem, to be able to work together to manage our customers. Because if the customer is happy and can see the value from their insurance then you move away from price. And that has to happen.”
Brown and Markel UK are putting their money where their mouths are when it comes to delivering on that sustainable solution piece, with a new sector solution aimed at the construction PI space due to launch in Q1 of next year. The team is in the process of building that out right now, he said, but at the core of the solution is the Markel approach of going further than just providing insurance but rather helping customers proactively manage risk.
“We’re talking to brokers to get feedback, talking to customers to get their view so the proposition that we land with will have been road tested,” he said. “And I think that’s incredibly important. This isn’t just an underwriting view, and a wording that goes out, which I think is probably the new product development process for a number of providers out there.”
Staying ahead of what brokers and customers need from the PI market isn’t just the right thing to do, Brown said, it also makes absolute business sense. That’s why Markel is seizing every opportunity possible to deliver thought leadership and insight, not just to its brokers but also to the wider public through its online thought leadership content hub - ‘The Cover’ - which offers support and advice on a vast array of the pain points pressing on SMEs right now.
“It’s a really useful communication for brokers who want to understand more about what’s going in their market,” he said. “And it’s so helpful for SMEs because when you’re an SME, who do you go to for advice? It’s Google. And there is a perception in the market that it’ll be Amazon and Google owning the insurance market in the next 25 years. Well, if we keep doing this boom and bust cycle of managing things transactionally, then we’re making it easy for them.”