Professional Indemnity (PI) Today and Tomorrow by Tokio Marine HCC

Professional Indemnity (PI) Today and Tomorrow

Mind over risk

It’s a fascinating time for all of us engaged in the global PI market. Numerous forces have combined to create a hard market that’s set to be with us for the year ahead at least. Economic uncertainty coupled with the unrelenting pace of technological advancement creates challenges, opportunities and disruption; and we haven’t even mentioned Brexit yet...

State of the Market Colin Brown looks at where the PI market is today, how it got here, and where it might go nex t. The PI market has been steadily hardening since about 2017. Be�ore then, we’d grown accustomed to a so�t market that had been with us since around 2003. The previous hard market was triggered by the shattering events o� 9/ 11 in 2001, which sent shockwaves across the whole insurance world. It was the same year that the collapse o� Independent Insurance in the UK le�t many motor policies having to be replaced almost overnight.

Our PI Roadshows set out to look at how we

That hard market was relatively short-lived; lasting until about 2003. Now, 16 years later, a combination o� �actors mean we �nd ourselves there again.

see the market now and going forward.

Increasing competition

Thank you to everyone who attended and

The years since 2001 saw an infux o� providers, independent brokers and Lloyd’s managing agents. Rates were �erce, competition was in abundance and clients were able to enjoy premiums being held or driven down.

all our speakers. The feedback has been over whelmingly positive, so look out for news of future events.

One e��ect o� the economic crash o� 2008 was insurance being seen as a sa�e harbour �or investors getting out o� the credit and �nancial markets. Even when AIG had to be bailed out by the US government, the market remained so�t. Falling margins and growing losses Inevitably, increased competition has meant that insurers have had to manage their businesses on increasingly marginal pro�ts. For strong insurers, this is manageable, but many

have �aced large losses crystallising in their books and combined operating ratios (CORs) have been under pressure. At the same time, insurers have �aced increased reinsurance costs and regulatory expenses. In some cases, commission costs have held �rm, with some brokers getting as much as 50% commission on PI business. Lloyd’s posted a £3.4bn loss in 2017 and COR o� 114%. CAT losses in 2017 amounted to $19bn as a result o� hurricanes Harvey, Irma and Maria. And on the Lloyd’s review, non-US PI was the second worst-per�orming line o� business. By 2017, the number o� syndicates running at a loss stood at 52%, an increase o� 38% since 2015. Things had to change and, �ollowing an urgent review, loss-making syndicates were told to demonstrate realistic plans �or making a sustainable pro�t. Recent reports suggest that Lloyd’s has accepted plans �rom around two thirds o� syndicates, including some related to PI. It’s too early to tell i� this will mark the start o� a return to a so�ter market. The implications of Grenfell

Rates have increased over the last 18 months and there has been an exodus o� capacity, with policies �ailing to get past Lloyd’s. There has also been an infux o� claims on policies that it is now clear were written too cheaply. One response �rom insurers has been to broaden and extend combustibility exclusions. Where to next? Current conditions suggest the hard market is here to stay �or at least another year. We’d anticipate a �urther contraction in the market as companies reach capacity. It’s not yet clear how insurers will handle their renewal books, but the e��ects are likely to be �elt in the near �uture. For clients, that could mean rising rates. It’s also not uncommon �or the number o� disputes to increase in a hard market, and 45% o� large and complex claims in the UK are already in dispute.

Session presented by Colin Brown, Head o� Sales and Business Development – Pro�essional Risks, Tokio Marine HCC

What is clear is that premium alone shouldn’t dictate where a risk is placed. The ability o� insurers and brokers to negotiate both a hard and so�t market must always remain a key consideration.

The devastating �re at Gren�ell Tower and the subsequent enquiry, which has highlighted �ailings in building regulations and material testing, has a��ected PI across the whole construction industry. The impact has been �elt not just by cladding providers, but by architects, the health and sa�ety sector, �re inspectors and building inspectors too.

The Importance o� Being Early Andrew Wallen on why it’s never too early to notify a PI claim. The notifcation requirements in Tokio Marine HCC policies are broadly similar to others on the market. In simple terms, the Insured must in�orm us as soon as possible, and in any event within 28 days, once they become aware o� a circumstance that is likely to lead to a claim. Remember, this is a summary o� the actual wording. You must always �ollow the policy wording when deciding whether you need to noti�y us. Andrew Wallen, Solicitor/ Deputy Claims Manager – Pro�essional Indemnity, Tokio Marine HCC

It’s crucial to step back and ask whether an incident is likely to result in a claim. I� the answer is yes, passing details on to your insurer as quickly as possible is vital i� cover is going to be provided. Does noti�ying us mean your premium will increase? Some policyholders worry that noti�ying us, or even asking whether they should, will a��ect their renewal premium. That is not the case. Underwriters may review a premium i� it looks like there’s going to be a claim, especially one that will result in a payment under the policy. However, asking a question, or telling us about something that might go wrong, will not necessarily a��ect a premium. I� the notifcation isn’t necessary, we’ll simply note it against the policy in case it becomes relevant in the �uture.

Never attempt to solve an issue frst Insureds should never try to solve issues themselves without passing in�ormation on to their insurer. Trying to do this may put themselves at �urther risk and result in a matter not being covered by a policy. We’ve seen cases where insureds have inadvertently said something that has been taken as an admission o� liability. And other cases where attempts at remedial works have simply made things worse. What to noti�y us about All Tokio Marine HCC policies speci�y what we must be notifed o�. For example, we must be notifed about: “Any circumstance… which is likely to give rise to a claim against the Insured or a claim by the Insured under the Policy.” The defnition o� a ‘circumstance’ and the likelihood o� something giving rise to a claim are issues that crop up time and again. The answer isn’t straight�orward and even the courts have to grapple with this questions �rom time to time. Over the years, di��erent cases have le�t us with the �ollowing principles: i. ‘likely’ wording • ‘at least 50% likelihood of a claim occurring ’ (Layher v Lowe, 1996) • ‘is probable or more likely than not to occur ’ (Laker Vent v Templeton, 2009)

ii. ‘may/might’ wording • ‘at least a possible chance that a claim will result.’ (Rothschild v Collyear, 1998) • ‘…a real as opposed to fanciful risk o� under writers having to indemni�y insured.’ (Aspen v Pectel, 2009) The courts have also said that the insured needs to be subjectively aware o� any circumstance to be able to in�orm the Insurer: in other words, they need to know about it, but an insured cannot be expected to noti�y something it does not know about. Whether or not that circumstance may, might or is likely to give rise to a claim is judged objectively. To assess this, the court would put itsel� in the position o� a reasonable pro�essional with the same relevant knowledge and decide whether they would have reasonably thought a claim may, might or was likely to arise.

Case study: Euro Pools v Royal & Sun Alliance (RSA) Insurance Euro Pools designed technologically advanced swimming pools with moving walls that allowed the width and depth o� the lanes to be changed. However, it became apparent, by February 2007,that the steel beams within the walls weren’t working. Euro Pools advised their insurer, RSA, and proposed a solution that used in�atable bags, pursuant to the mitigation o� loss clause in the policy. It was believed this would �all within the sel�-insured excess. RSA agreed to the proposal. A t renewal in June 2007, Euro Pools noted the issue on their renewal proposal, indicating that the issue was being fxed. The broker indicated that they wanted the matter logged in case o� any �uture problems. By mid-2008, it became apparent that the in�atable bags would not solve the issues and the only solution was hydraulics. RSA confrmed that it would cover these costs under the 2006/ 7 policy. Euro Pools had received about £4.3m o� the £5m limit o� indemnity under the 2006/ 7 policy to try to fx the initial problems. They believed the additional issues, namely the realisation that hydraulics were required,

Indicators that the court would be likely to consider would include whether: • the Insured’s client had indicated dissatis�action • the Insured’s client had indicated they’d su��ered a fnancial loss as a result o� something not being done • the Insured was aware o� a shortcoming, even i� their client was not. The best advice i� you’re not sure is to always noti�y us anyway.

�ell under the 2007/ 8 policy and sought another £ 1.5m �or a second remedial scheme on this basis. Inevitably, the matter proceeded to trial. The court initially �ound �or Euro Pools; namely that both policies were triggered. RSA appealed to the Court o� Appeal which �ound that only the frst policy was triggered. The Court o� Appeal stated that the exact scale and consequences o� the the problem did not need to be known �or the matter to be capable o� notifcation. In other words, once there was an issue with the pool walls there was a circumstance capable o� notifcation. The Court o� Appeal recognised that RSA couldn’t expect to know what caused the problem when Euro Pools notifed them o� it because Euro Pools couldn’t have known themselves the cause or consequences o� the problem. However, Euro Pools did know there was a problem with the pool walls, which had been notifed to RSA under the frst policy. There�ore, once a circumstance has been validly notifed to insurers, then any claims arising �rom that circumstance will �all �or cover within that period o� insurance provided there is a causal, not merely coincidental, link between them.

Typical Tokio Marine HCC wording Always check your actual policy �or the wording that applies to you.

b. any notice o� intention to make a claim against them;

As conditions precedent to their right to be indemnifed under this Policy the Insured :

c. any Circumstance;

1. 1 shall in�orm the Insurer as soon as possible, and in any event within 28 days o� the receipt, awareness or discovery during the Period of insurance o�:a. any claim made against them;

d. the discovery o� reasonable cause �or suspicion o� dishonesty or �raud. Such notice having been given as required in b), c) or d) above, any subsequent claim arising out o� such notifed matters shall be deemed to have been made during the Period of insurance.

The Current State of the Liability Insurance Market Ian McFadyean on the key trends, themes and infuences in the liability market. Global political and regulatory challenges The global market remains challenging, with international political and regulatory conditions infuencing the UK’s competitiveness as an international insurance centre. Ian McFadyean, Business Development Manager, Tokio Marine HCC

Insurers and brokers continue to �eel the additional regulatory burden o� compliance while Insurers are adopting more e��cient business structures in order to better manage their regulatory capital requirements under Solvency II.

New personal injury discount rate On 15 July 2019, the Lord Chancellor announced that the new Personal Injury Discount Rate is to be -0.25%. Many insurers had budgeted �or a greater reduction in the rate and will now �ace increased costs.

Continuing advances in immunotherapy treatment means survival rates �or conditions related to asbestos are now at unprecedented levels.

The discount rate doesn’t apply to accommodation costs. Roberts v Johnstone established that the appropriate measure o� compensation in accommodation was not the capital cost in acquiring property, but the notional value o� the capital. For example, mortgage interest payments or periodic payments to allow �or the interest on the decreased use o� revenue. It assumed that the claimant would already have accommodation, or savings to �und or enhance their accommodation. The di��culty in Roberts v Johnstone was that there was no property or su��cient liquidity.

Treatments are becoming more expensive, while their success also means they must be �unded �or longer periods . This means increases in the

A pilot case, Swi�t v Carpenter, has been accelerated to the Supreme Court �or hearing in March 2020 to understand whether the discount

Brexit Brexit and the surrounding uncertainty around �uture compliance and regulatory rules continue to make decision-making tricky �or insurers, brokers and clients alike. Rising care costs for asbestos claims

overall li�etime cost o� care, which is likely to see a rise in the cost o� damages payments over the next two or three years.

rate should apply to accommodation claims in circumstances where it would e��ectively result in claimants paying money back to their indemni�ers. The outcome o� the case could change the way accommodation claims are paid in �uture. Rates and market capacity There have been some increases in rates over the last 12 months and the Acturis Premium Index has risen by 7.9% in quarter two this year compared to the same quarter last year. Willis Towers Watson recently reported increases �or the last six quarters across property and �nancial lines, particularly �or D&O business. A number o� insurers have pulled out o� liability lines, including AM Trust, Aspen and Tokio Marine Kiln. MGAs MGAs have been an important part o� the market over the last 10 years. They’ve bene�tted �rom �reedom, fexibility and a lack o� overheads, enabling them to write signi�cantly lower prices than the rest o� the market, which has made them a sa�e haven �or capacity providers. However, a number o� current trends, including the Lloyd’s review, Brexit, and developments in InsureTech, could impact the �uture attractiveness o� MGAs to investors.

dynamic and the way Insureds view insurance requirements. Along with the rapid development o� the g ig economy including companies like Uber and Deliveroo, we are also seeing the rise in “just-in-time buyers“ and companies being established to take advantage o� that demand. Lemonade in the United States is an example o� one such innovative company, but we have also seen companies established in the UK to cater �or changing demands and needs – By Miles was established �or low mileage drivers who see little value in an annual insurance policy. With increasing consumer demands so we become reliant on a greater use o� technology. This will only increase with time. Construction In Liability and Construction, we are seeing very di��erent building techniques or Modern Methods o� Construction (MMCs). The problem that Insurers have with MMCs is that �rstly, there is no universally agreed de�nition o� what it is and secondly, because o� the very nature o� the materials being used, there is a lack o� data and experience �or Insurers to base their underwriting and, there�ore, pricing on. Add in larger value contracts that are becoming more common place and the �act that these contracts are also increasing in complexity and duration, then the demands placed on Insurers grow ever larger.

Changes to buying habits We are already seeing a growth in direct SME buyers, which is changing the market

Technology and the Changing Workplace Ed Lewis �rom Weightmans invited three colleagues to look at some o� the ways tech will continue to infuence PI. In the chair:

with…

Ed Lewis, CyXcel (Global Team Leader) and Head of London Market at Weightmans LLP

Will Healy, Associate at Weightmans LLP

What does tech and the digital revolution mean for us in PI? Will: The digital revolution is completely changing the way we do business and the tools we use. That brings new types of risk as well as magnifying and multiplying existing risks. There’s going to be increased demand for cover with huge opportunities for insurers and brokers. So, that puts an obligation on us all to understand the risks and new technological landscape.

Robert Crossingham, Partner at Weightmans LLP

Amy Nesbitt, Principal Associate (Barrister) at Weightmans LLP

Amy: Flexible working or agility in the workplace is likely to mean employees working in various locations, at hours that suit them, while the gig economy model increasingly sees independent contractors delivering a service. Each of these developments presents a new set of risk management and insurance challenges. Rob: The European Commission has looked at how the chain of liability works when tech is involved. For example, what happens if someone has been let down by a professional who was relying

on tech that failed? Do you look along the chain to the person who input the data, the organisation that created the data body used by the tech used, the software designer, or even the hardware manufacturer? What is clear is that liability analysis becomes a lot more complicated. One idea is that tech entities – robots, algorithms and AI – might be independently regulated, each with its own separate liability policy. Will PI coverage ever work on a pay-as-you-go basis? Amy: PI insurance will need to evolve to accommodate the pay-as-you-go model. The new reality is that individuals switch from one job to another with different operating systems and different roles. For example, an Uber driver might work for Uber in the evening, Deliveroo in daytime and outsource some spare time on Task Rabbit. The answer to insuring this kind of risk could be insuring the whole platform to cover both ends of a transaction.

Are traditional proposal �orms ft �or purpose when it comes to pro�essions? Amy: The accessibility o� distribution models that �acilitate peer-to-peer transactions means growth will continue at the current speed and scale. For example, Uber went �rom a private hire company to a �ood delivery service almost overnight. Clearly, this makes annual reviews inadequate. Proposal �orms must ask the right questions �rom the outset and be reviewed regularly to �ully understand the client’s internal business processes. Will: The term ‘cyber’ can relate to many di��erent things under a single umbrella and there is no industry agreement about what it does and doesn’t cover. Some brokers are �acing resistance �rom their clients when cyber isn’t included under a general liability policy and a separate cyber policy is needed.

Customers involved in a data breach can now make a claim �or the distress they’ve su��ered as a result. There are now many law �rms that are looking to bring large-scale distress claims as a result o� data breaches.

place much more value on their �ree time and work/ li�e balance. They’re likely to choose to work �or companies that will provide what they want �rom an employer resulting in a degree o� sel�-regulation.

Businesses need to make sure that their customer data is adequately protected and have suitable insurance and risk management tools in place to mitigate the risk o� both a data breach and distress claims as �ar as possible.

Can we trust tech?

Amy: Agile working and the gig economy are growing at a rapid pace. In 2017, the gig economy accounted �or 2.8 million o� the UK work�orce. By June 2019, it had risen to £4.7m. As this model o� working continues to grow and more industries buy into it, their risk pro�le increases, and employers must be aware o� the legal and regulatory consequences o� operating in that �eld. Ed: Three strands o� liability have opened up:

What are some o� the specifc risks?

- overall liability and employer’s liability

Rob: Automation is designed to save time and cost �or the consumer by repeating preprogrammed tasks. But that also means there’s potential �or losses to be magni�ed and claims to multiply as an error will continue to be repeated until it is stopped.

- fexible and home working and how employers can best mitigate any potential or unknown negative e��ects on health and wellbeing

Will: Since GDPR came into �orce in May 2018, the duty to handle customer data sa�ely has become more onerous. The regulatory environment is now very di��erent, with the ICO able to issue �ar larger �nes. The biggest GDPR �ne since the new regulations have been in place was £183m.

- the importance o� data. Amy: Those who work on their own terms and at their own hours tend to work harder and �or longer, but the line between home and work li�e becomes blurred. Ultimately, society is the driving �orce in determining what is or isn’t acceptable. Will: Younger workers are less interested in earning the highest possible salary and instead

Ed: Technology does two things: it extracts in�ormation, or makes decisions, based on what it’s been programmed to do. However complicated the decisions parameters are, the technology obediently works through them as it’s been programmed to do. It can’t disobey or deceive. Rob: The European Banking Association recently pointed out that computers don’t steal – there’s a �ar greater risk o� �raud �rom a �ellow human than �rom a computer. Are there any specifc pro�essions that would be impacted by the technology that we’ve identifed? Rob: There’s increasing automation, technology and AI in most traditional pro�essional services sectors. And, as a result o� direct access to insurance products in the retail sector, brokers have seen erosion on their market in the last 20 or 30 years. Valuation – For around 15 years, surveyors have used AVMs (automated valuation models) in mortgage valuations. According to the Royal Institution o� Chartered Surveyors, 20% o� all mortgage valuations use a degree o� AVM but it’s widely accepted that human input �rom a quali�ed surveyor is necessary. Regulators have recognised that incorrect use o� AVMs would

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have pro�ound e��ects on mortgage lending and, there�ore, the economy more broadly. InsureTech – The gig economy is likely to push the growth o� usage-based insurance such as telematics car insurance. More sophisticated examples o� this technology are being used in shipping. Maersk and Mitsui have both made use o� blockchain technology to provide real-time insurance �or cargos. Legal – There are many advantages o� using tech �or the legal pro�ession. Aside �rom reduced cost, speed and bias, technology o��ers greater accuracy, predictability and stability.

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Fintech – The UK has been identifed as the best country in the world in terms o� the government backing the use o� technology to deliver pro�essional and fnancial services. What are some o� the opportunities brought about by tech? Amy: One exciting opportunity is in new and emerging pro�essions. Freelance solicitors can start operating in November as long as they hold ‘adequate and appropriate insurance’ – they won’t need to hold minimum terms o� cover. This is an opportunity �or �reelance solicitors to operate in a similar way to barristers and, by accepting their own insurance, they will open up a gap in the market.

Rob: Technology provides an opportunity �or pro�essional services to be provided at a lower cost as repetitive tasks can be automated. This gives consumers more options to access services, whenever and wherever they need to. Will: Technology improves e�fciency and proft margins. It’s also scalable and conducive to job creation as humans will always be needed to train and program machines and monitor the output. The technological revolution will bring opportunities �or everyone and should be embraced. Amy: There needs to be greater education and understanding about the processes and technologies that are used, and about the problems that can arise �rom using them in an ever-changing work environment. To stay ahead o� the curve, brokers and Insurers must demonstrate to clients that they understand the changes that are taking place – and the risks presented by them, while also o��ering a solution.