Insurance – Navigating the hard market

The annual process of renewing Professional Indemnity (PI) and Directors and Officers (D&O) Insurance covers is a necessary process which will be familiar to all local financial services businesses.

A necessary purchase

The level and source of cover which is purchased is a multi-faceted board decision driven by various stakeholder considerations, not least of which is the minimum level of cover required by the regulator. As an example, for fiduciaries, there is a minimum figure for aggregate cover (multiple of 3 times the turnover related to licensed activities) and a maximum figure for deductible (3% of same turnover). Directors are expected to evidence that the cover and financial resources they have are sufficient for their business.

Hard market

Members of boards will not fail to have noticed the rapid hardening of the PI and D&O markets and the consequent difficulties of meeting regulatory requirements in this respect.

The most notable features of a “hard market” include a shortage in the supply of cover available, an increase in the price of market and a tightening of terms being offered. It should be recognised that this is a usual feature of the insurance cycle as, in due course, new capital will be attracted to the market, resulting in a “softening”.

The current hard market can be seen as resulting from something of a perfect storm of contributing factors:

  • Huge costs associated with event cancellation insurance claims (Olympics, music festivals, Wimbledon, etc)
  • Continued low investment returns for (re)insurers
  • Directive from John Neal (Lloyds CEO) that underwriters need to be able to deliver underwriting profits (bottom line as opposed to top line focus)
  • Long overdue market correction, which is often overlooked


Potential actions to take in response to the current hard market include:

Build closer relationships with your insurance broker and primary insurer. They are key business partners who can only provide greater value by truly understanding your business. Don’t regard this annual purchase simply as a transaction

If your total insurance spend across all classes is sufficiently large, consider a higher level of risk retention through a self-insurance structure such as a standalone captive subsidiary or a cellular solution via one of the local insurance managers

Improve the quality of your risk management in order to be able to demonstrate a profile which will result in reduced premiums at next renewal

If the hard market persists in the longer term, we would not be surprised to see discussions on alternative solutions relating to capacity provision at trade association or even financial service sector level. The former is common in the US in the form of risk retention groups and the latter has been seen at a national level in the UK (Pool Re).

However, we see both of these as remote possibilities and that the more likely scenario is that this hard market will have to be seen out in a more traditional manner until capacity returns.

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