While car insurance and increasing public liability premiums tend to hog the insurance-related headlines, last year’s professional indemnity (PI) insurance renewal was difficult for a number of engineers, writes Brian O'Mara.

In the below piece we reflect on the past 12 months as well as our expectations for 2020. We also revisit steps that all companies can undertake to best present their ‘risk’ to insurers.

2019 summary

Our article of April 2019 summarised how the professional indemnity market for engineers is difficult at present. In a nutshell, a number of insurers exited the London market and those that remained increased their rates, with local insurers following suit with respect to premium increases. Conditions remained tough, particularly as the year went on and ‘capacity’ became an issue.

Capacity – the word of 2019

There is a monetary limit on the amount of insurance cover (in financial terms) that an insurer can underwrite in a year – this is referred to as their capacity.

In essence, their annual capacity it is a measure of the amount of risk they are permitted to take on in a given year. This has not been an issue in recent years as there were sufficient insurers in the market.

However, due mainly to poor results, a number of insurers have been forced to exit the market and a shortage of capacity has arisen in the past 18 months. This has resulted in a risk averse market.

As a practical example, take a firm that requires €5 million of PI insurance. This level of cover was previously provided by one insurer, but now, for capacity reasons, the same insurer might only offer €2.5 million of cover, thereby reducing their risk, with the necessity for a supporting insurer(s) to be secured to bring the cover up to €5 million.

This can very often lead to an overall premium increase with a knock-on effect of making it difficult to secure additional cover above the aforementioned €5 million.

The end result was that some firms could not obtain PI cover, others had to reduce their limit or had to take reduced cover.

The experience varied wildly – for example on a very general basis a mechanical and electrical engineer would have more options than a civil/structural engineer, and as such the M&E firm may have experienced a smoother PI renewal.

There are also plenty of other factors that could have resulted in a difficult renewal including poor claims experience, or having involvement in specifying cladding.

It is important to note that this is not specific to Engineers Ireland members. We could easily say the same for a number of professions such as accountants, architects, contractors, solicitors and surveyors.

While there are always exceptions, PII premiums generally speaking are on the increase globally. The market may be difficult but the reality is that we were able to source adequate PI cover for all of our engineering clients last year.

This is the benefit of dealing with specialists – we look after a lot of similar business, which enables us to better understand your ‘risk’ and properly discuss each policy with insurers.

What to expect in 2020

In very general terms a typical enough rate increase for engineers PI was 10-20% last year, which would be on top of any premium increase due to increasing turnover.

Some companies experienced increases of a lot more than 100%. There comes a point where someone has to take the view that they can underwrite engineers PI at a profit.

The PII market can quickly change, particularly in a small market such as Ireland where one or two new entrants quoting competitive premiums forces incumbent insurers to sharpen their pencils.

Lloyds of London/UK insurers

However, right now it is difficult to see where these new insurers are going to come from. Historically we look to Lloyd’s of London when conditions become difficult at home, but this hard market started in the UK.

Hard markets usually coincide with economic downturns, which is not the case at the moment. We are certainly in unusual times.

Ireland

It looks like the London market is still contracting for now. Therefore we are hoping for someone to take a view that it is worthwhile to set up a base here in Ireland, which would increase competition.

We have come across a few insurers carrying out due diligence on the Irish PI market, but as yet have not seen anything concrete as regards new entrants.

There was one new entrant to the Irish PII market last year, but they are very much focused on the larger firms and are not necessarily keen to compete solely on price so it is hard to see them having too much of an effect on overall premium levels.

We have also had conversations with the existing Irish insurers and the overall feedback is that there is not much appetite to grow their existing books of engineers' PI insurance.

Most will be looking for rate increases on their renewals. At the time of this article going to press it is reasonable to expect hard market conditions to continue for now with a strong likelihood that rates will continue to increase for 2020.

Promote your ‘risk’ to insurers at renewal time

1) Get your proposal form in early. We would generally send it to our clients six to eight weeks prior to renewal, which should be returned within a fortnight to allow your broker sufficient time to review the answers and to obtain the best possible renewal terms.
2) Claims – ask your broker for an updated formal claims report. This shows costs incurred and what the insurers are setting aside (reserving) for future costs. You are entitled to this and if alternative quotes are required / preferred, insurers will have to see this document before they can confirm cover.
3) The claims report provides very basic information. Include a brief summary note outlining the circumstances of the claim. Just as important – explain what steps were taken to prevent it happening again.
4) For excess layers – price these up before committing to purchasing higher cover. However bear in mind that you may have to keep the cover in force for several years post-completion, and future pricing is not easy to predict. A positive is that the higher limits enable a firm to tender for larger contracts.
5) If you are talking to a new broker, ensure that they understand your risk. They should be asking questions that are specific to your business and that make sense to you – this helps you gauge their expertise. You must be confident that they will present your ‘risk’ correctly to insurers.

Contractual requirements

• Companies signing up to contractual requirements such as Collateral Warranties should be cautious as to what they agree to. We have yet to see what our clients are being asked to sign up to being reflective of current market conditions.

A standard requirement for many contracts would be to carry €6.5 million of PI for the duration of works and to maintain this cover for six years post completion.

Often the client on these contracts will push for a higher limit or a longer indemnity period. Capacity is limited as we have seen and premiums can be expensive for higher limits where they are available.

Companies need to make sensible commercial decisions and caveat any undertaking to purchase cover is “subject to cover being available at commercially acceptable terms” or to that effect.

• Another related and important point is that these same clients still tend to insist on ‘any one claim’ PI cover. This is the best cover available, and at the moment most engineers have it in force.

However we’ve seen some instances where insurers want to reduce cover to the aggregate basis. This means you have one aggregate limit in the policy period for all claims, usually including defence costs.

This is already the case for many contractors, who have already experienced a push towards ‘aggregate’ policy limits from insurers.

We have seen examples whereby contractors can no longer obtain the cover that they had contractually agreed to, and more recently we have come across a small few engineers being offered aggregate cover – possibly due to their activities or due to prior claims. It is not inconceivable that this could become more widespread.

• Some of these contracts are poorly worded. We still see clients asking to be named on PI policies. This is more standard on public liability policies where it makes sense.

However for PI it defeats the purpose for a client to be named, as they would not be able to claim against the policy – you cannot claim against yourself! It’s not something insurers will agree to anyway for reasons I won’t go into here.

Cladding

One of the key issues post- Grenfell has been cladding. That fire has turned out to be the canary in the coal mine, with similar cladding issues being experienced in other jurisdictions such as Australia.

In January, the state of Victoria had to enact a temporary measure allowing for cladding to be excluded on local PI policies due to the last remaining insurer pulled out of withdrawing from the market.

Here in Ireland we have not had such issues, but we are only one element of a much bigger picture. For example one London insurer has reserves of more than £100 million for cladding claims globally.

This prompted them to carry out a review of their entire global book of business and the end result is that they no longer offer PI to Irish engineers. As most readers know, when London coughs we tend to catch a cold.

As such, companies who have involvement in cladding, composite panels or curtain walls are being asked a number of questions by most insurers. Fire engineers only have access to a limited number of PI insurers, but even more so if there is cladding involved.

Author: Brian O’Mara has specialised in professional indemnity insurance both in Ireland and abroad since 2008. He returned to Ireland in 2015 to work with Ireland’s largest independent broker, O’Leary Insurances. In that time, he has focused on sourcing insurer capacity for difficult to place risks, including PI for engineers of all sizes. Email: bomara@oli.ie or telephone 021 453 6860/083 842 4087.