'Times to get harder' for PI and D&O

7/05/2008

Risk consultancy Flaxman Partners has predicted that "times are going to get harder" in light of the sub-prime lending crisis.

The organisation suggests that the current turbulence in the financial markets is to have the most significant effect on the global Professional Indemnity (PI) and Directors' and Officers' (D&O) insurance sectors in the past decade, other than the September 11th terrorist attacks.

However, the exact turning point for the market remains uncertain, according to a recent market report from the firm.

Flaxman Partners contends that again an external factor not directly related to either PI or D&O may eventually prove to be the pivotal influence in bringing the decade-long soft market conditions to an end.

Reinsurance is likely to see the most immediate response should such a factor arise, the consultancy suggests, as it is more closely linked to the money markets than the direct insurance sector.

Meanwhile, the organisation proposes that all classes of reinsurance could be affected on a wide scale before the impact filters down into a single product.

While it is still too early to predict the full effects of the sub-prime crisis, Flaxman Partners observes that some effects are beginning to materialise among professional practitioners.

Some PI providers have already withdrawn coverage for surveyors' valuations, while D&O providers are anticipating an upturn in the number of claims received.

Flaxman Partners says: "Now is a good time to buy this cover. It is very valuable when it is needed and it is becoming needed more often."

"Claims are already being seen in property and valuation-related businesses and these are forecast to spread to solicitors, accountants and financial advisers involved in the home loans and commercial lending markets," the market report adds.

The ultimate outcome of these claims may not emerge until the next calendar year, as many contracts are unlikely to be renewed until December 2008 and January 2009.

But delays in hardening market conditions may result in more widespread restriction of policy terms in the subsequent months, according to Flaxman Partners.

"If prices remain too low too long it will be reflected in the payment of claims, reductions in the breadth of coverage, increased levels of self-insurance and a paucity of service," the market report contends.

Despite such a risk, both PI and D&O are identified as sectors which continue to be seen as attractive by insurers, in spite of the soft conditions in recent years.

The consultancy claims that insurers are looking beyond the low profitability margins offered by highly competitive premiums and remain interested in both classes of business.

In terms of timescale, Flaxman Partners anticipates that a shift could occur tomorrow, or in a year's time.

But it notes that a key topic for finance directors to consider is what action to take to best prepare for when any change in market conditions does occur.

Neil Pointon of Lloyd's broker PYV Limited added: "PI insurance is usually arranged on an annual basis but the current soft market conditions has resulted in some Insurers being prepared to offer longer period policies. It may be a case of grab these deals while you still can as these will give you benefit of the current highly competitive premiums over the next couple of years."

Meanwhile, many brokers anticipate the final quarter of 2008 and the first three months of 2009 to be the most significant periods during which change could occur.

This is likely to come about once insurers are confident that they can increase their premiums without losing business to competitors, as only a "brave insurer" would raise prices as a point of principle.

Once one or two insurers do make the move, however, Flaxman Partners notes that the remainder of the market typically follows suit relatively quickly, causing significant pain to insured parties.

"It can arrive with the speed of a hurricane and leave as much damage in its trail," the market report observes.

The organisation states that while insurance such as PI and D&O is compulsory for some practitioners, it represents an "economic necessity" for all policyholders.

Flaxman Partners concludes: "Litigation increases when money and credit is tight."

PYV are one of the UK's leading providers of professional indemnity insurance. This news article has been produced by Adfero in collaboration with PYV and its unauthorised use is not permitted.

(c) 2008 Adfero Ltd.

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