Navigating difficult terrain in PI

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Arch Insurance shines a light on challenges facing the PI market, the need for underwriting discipline, and the critical role of experienced underwriters in providing robust protection

THE PROFESSIONAL indemnity market is no place for novices right now – tough economic conditions, higher interest rates, weak business growth and surging litigation are just some of the challenges. In skiing parlance, PI is currently something of a black-diamond course and not an environment that beginners or even intermediate players can confidently traverse. In the following interview with Insurance Business, Anthony Hinde, underwriting manager for professional indemnity at Arch Insurance in Australia, emphasises the importance of maintaining underwriting discipline, and the invaluable role of experienced underwriters in navigating terrain that demands a high level of skill. Conditions are ripe for an increase in PI-related claims as

At Arch Insurance Australia, we offer specialised insurance solutions across industries, focusing on financial lines, property, casualty, cyber, and accident and health. Based in Sydney and Melbourne, our empowered underwriters develop innovative solutions for brokers of all sizes. Our dedicated in-house claims team ensures efficient claims handling, prioritising broker and client needs. Part of Arch Capital Group Ltd, an S&P 500 company, we leverage global expertise to address evolving complex insurance risks.

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“In the current conditions, the underwriter’s experience is invaluable, and the quality and scope of the cover provided becomes even more important given the increased claims potential and need for robust protection”

Anthony Hinde, Arch Insurance

the advice of consultants or advisers comes under greater scrutiny, underscoring the need to provide robust protection. Hinde discusses market changes, Arch’s unique approach, the importance of bespoke coverage, and how Arch supports at-risk groups amid economic fluctuations. He also highlights the dangers of an increasing commoditisation of the PI insurance product as some insurers shift more towards online models, as well as the critical role of comprehensive retainer agreements and strong broker relationships in ensuring clients understand their coverage.

Anthony Hinde: Australia is a highly regulated and notably litigious region where professional indemnity insurance is commonly relied upon to defend or protect organisations. The PI market is therefore a mature one; however, it has undergone a challenging period in the last five years, which has resulted in several insurers exiting the market. More recently, as market conditions have stabilised, there have been signs of green shoots emerging with new capacity entering the sector, including from London Market insurers.

While this is a positive development for the sector, it’s important to recognise the ongoing economic challenges, including interest rate hikes and the slowdown in growth across the region. Such dynamics traditionally result in an increase in PI-related claims as the advice of consultants or advisers comes under greater scrutiny and the potential for litigation increases. It is therefore imperative to maintain underwriting discipline in this sector. In the current conditions, the underwriter’s experience is invaluable, and the quality and scope of the cover provided becomes even more important given the increased claims potential and need for robust protection.

AH: Arch has a long-standing presence in the Australian PI market, having entered the sector in 2015, and we have continuously strengthened that presence throughout the varying market conditions. We are proud to be recognised by our brokers as a long-term and reliable partner with meaningful capacity. We have an experienced local PI team with deep technical expertise and understanding of the Australian market, as well as strong relationships with our partners and clients that have stood the test of time.

Our underwriting approach is also a key market differentiator. We are focused on having underwriters on the ground who are eager to trade and to discuss risks directly with brokers. Our team are empowered to ‘do the deal’ and are experienced in structuring bespoke policies to ensure the best possible coverage for our mutual clients. Our trading attitude is very much “trade the way our brokers want to trade”. For many of our broking partners, they are keen to discuss their clients’ needs face-to-face with our underwriting team and with an underwriter that they know and trust – this consistency of approach and relationship building is very important to us.

How do you see the PI market, generally speaking?

What is your point of difference for PI? Why is this important?

Published 17 Jun 2024

“We are focused on having underwriters on the ground who are eager to trade and to discuss risks directly with brokers. Our team are empowered to ‘do the deal’”

Anthony Hinde, Arch Insurance

APRA National Claims and Policies Database annual analysis, July 2023

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

$1,000

$2,000

$3,000

$4,000

$5,000

Average written PI premium in Australia by underwriting year

Source: Courts database direct link, CreditorWatch Business Risk Index report (May 2024)

Nov 2022

500

1,000

1,500

2,000

2,500

Court actions surging as economic stress increases

Dec 2022

Jan 2023

Feb 2023

Mar 2023

Apr 2023

May 2023

Jun 2023

Jul 2023

Aug 2023

Sep 2023

Oct 2023

Nov 2023

Dec 2023

Jan 2024

Feb 2024

Mar 2024

Apr 2024

3,000

Number of court actions

AH: As mentioned, there is an increasing inflow of new capacity coming into the market both from insurers new to the sector and those who have previously withdrawn looking to re-enter. We’re seeing that much of this new capacity is currently being deployed in the larger corporate space and in particular on providing excess layers cover. We have also seen evidence of increased commoditisation of the PI insurance product as some insurers are shifting more towards transacting business online. While this creates efficiencies, given the complex nature of the market it’s important to recognise the value of being able to develop bespoke cover that provides the strength of protection professionals require.

What’s behind the changes we are seeing in the market?

We also have a highly experienced local claims team. That means that when the time comes to call upon the policy, we have the expert knowledge on hand to manage the claim quickly and professionally in order to achieve the most effective resolution.

AH: In many professions, the scope of advice or the retainer agreed upon at the beginning of a project or working relationship does not accurately reflect the specific advice or full scope of the work undertaken. This is particularly the case with long-term contracts, where the scope of work and advice required changes over time but the contract itself remains unaltered. When a claim occurs, the description of the scope of services provided in the contract is critical information and often determines the success of a claim. Comprehensive retainer agreements and reviewing and updating the retainer at regular intervals can greatly assist in mitigating any potential exposures the professional may have.

What mitigation steps can be taken by customers?

AH: The current economic climate is clearly conducive to an increase in PI-related claims. During financially challenging periods we do see an uptick in litigation targeting specific sectors such as lawyers and accountants. Changes in legislation can also act as a catalyst for legal action. One example is the Design and Building Practitioners Act, which has introduced a series of requirements relating to the building of high-rise developments that could lead to increased exposure in the design and construct sector.

What groups are most at risk or in need of assistance?

AH: A key challenge is ensuring that insureds have a clear understanding of the level of protection a comprehensive PI policy provides. In economically challenging times, an insured’s clientele may increasingly look to recoup losses from those who advise them or provide consultancy services. Recognising that the cover has the dual purpose of rectifying any errors in advice as well as protecting the insured’s professional integrity can sometimes be lost in the pursuit of premium savings. From an Arch perspective, the close working relationship we have with our brokers ensures our mutual clients are fully versed in the scope of the policy they are purchasing and have a clear understanding of how it will respond in the event of a claim.

What are the challenges of making sure firms are adequately covered given the current economic outlook?

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