Column: Big losses = big changes for insurance industry

Losses have piled up
Losses have piled up

Don’t mention the ‘B’ word to Lloyds of London, the historic home of insurance.

Not Brexit but billions, billions of pounds of losses. A £1 billion pre-tax loss in 2018, following a £2 billion loss the year before.

Lloyds have been hit by numerous worldwide disasters in the past couple of years, but their problems are deeper rooted than ‘bad luck’ with hurricanes and other natural catastrophes.

The strategic review instigated following the losses has identified underlying issues with the way Lloyds transact business and the worst-performing classes of insurance such as Professional Indemnity (PI) where most syndicates pay out more in claims than they collect in premiums chasing market share rather than profitability. They have been told to clean up their act or stop writing business.

The reaction to the review has shown how sophisticated insurance underwriting can now be.

When I started in the industry in the 1970s, insurers gathered some statistics but nothing like the computerised information available now.

Back then premiums would have increased across the whole of the PI account, whereas nowadays insurers can target the problem areas. These are currently Financial Services and Construction (Design and Construct) and even in these sectors insurers can drill down to get to what they now perceive as the most troublesome and, in some cases, almost uninsurable risks.

With Financial Services it is investment and pensions that are the worry, particularly following the recent increase in the Financial Services Ombudsman compensation limit from £150,000 to £350,000 and with the Ombudsman’s track record of favouring consumers many insurers have pulled out of this market.

With Design and Construct PI there had already been a market reaction following the 2017 Grenfell Tower tragedy, with not only the cladding industry facing increasing premiums and restricted cover, but also those involved in high-rise buildings or fire protection.

Following the Lloyds review, any contractor undertaking design work is likely to see an increase in their PI premium with insurers also trying to limit their liability. Some are trying to impose aggregate (the total of claims allowed during any period of insurance) limits rather than any one claim, include defence costs within the limit (previously costs in addition was readily available) and apply the excess to defence costs, rather than just the compensation part of the claim.

These limitations may be an issue to contractors who have contractual commitments for certain levels of cover, although such agreements do tend to have an ‘assuming commercially available’ get-out clause and in most cases wider cover is still available, albeit at a cost.

Away from construction and financial services the so-called ‘miscellaneous professions’ shouldn’t suffer too badly, but construction related professions such as surveyors will probably face above inflation increases.

Whether the market has over-reacted remains to be seen but these changes are often cyclical and other than for very high-risk sectors we’re likely to see insurers competing hard for business again in the foreseeable future.