In-depth - liability: Breaking free

The change in the Ogden discount rate has had a large impact on the liability market, but there are more factors at play in this fast-moving sector, Ed Murray writes

Premiums for combined liability insurance policies hardened in the last quarter of 2017, according to the latest Acturis Premium Index. This builds on rises in the previous two quarters, but many remain cautious about sustained increases in such a competitive sector.  

The change to the Ogden discount rate was the front-page headline in the liability market last year. The box below looks at the impact it had and the ongoing consultation to have it revised again. 

But the liability market is bigger than Ogden and there are several important issues in play. These range from advances in auto-rating and e-trading, to evolving products and potential pitfalls with wordings and exclusions. 

Overview of rates

Giving his view on liability premium rates, Gavin Dollings, director of commercial underwriting at Covéa, says: “Away from the reduction in the discount rate, we are seeing average claims costs related to bodily injury rising at levels well in excess of inflation.” He suggests that claims inflation assumptions differ by insurer, but that for bodily injury most will work to anywhere between 3% and 8% depending on the risk profile within the portfolio. He continues: “This is driven by the rising cost of care in the UK alongside developments in emergency care, advances in medical science and the improvements in life expectancy following personal injury.”

Adding: “Pressure on profitability has been exacerbated by limited investment income which has served to reinforce the need to deliver a positive underwriting result from liability portfolios.” 

Insurers looking to push through increases must balance their desire to improve underwriting returns with their need to retain business in a very competitive market. It is unlikely, therefore, that liability premiums will rocket upwards and Chris North, technical manager for Towergate Broking motor division, comments: “In the short term, market conditions are likely to hold any further rating increases down to just a few percent. The medium to long term outlook is harder to predict, though underwriters will no doubt do their level best to make sure their liability rates at least keep up with claims inflation.”

Technology at play 

One factor for insurers to consider when setting rates is the cost of transacting the business. Auto-rated and e-traded policies can deliver savings as insurers seek to trim their overheads.   

Looking at auto-rated premiums, Thomas Stuart, insurance development director at Acturis, says they start at around £250 for sole tradesman, per capita liability cover and go up to £5,000. However, he says some risks can be higher, and while they attract some intervention from an underwriter, the system can handle them easily. 

“We are confident that you could continue to see average e-trade premiums increase and we have seen that year-on-year as people get more comfortable with it,” he says. “And that is both on the broker side and on the underwriter side.”

Stuart notes that Acturis is currently working on creating a panel for combined liability cases as opposed to simply per capita liability cases.  

“This is where, for example, you have a wage role and there is a much bigger business. For some reason they are not buying packaged up property and casualty all put together. They are deliberately buying their liability separately and so that generally means you are talking about more complex businesses or those with a higher turnover. In short, bigger risks.” 

It is possible to only buy certain covers within the combined offering, essentially making it possible to buy standalone covers and Stuart says there is a lot of focus on developing this area.   

Growing interest in professional indemnity 

Many are taking their learning from the combined liability market and deploying it effectively in the professional indemnity sector. For instance a number of players have sought to offer a combined professional indemnity policy and are enjoying success. 

Bhavik Desai, senior underwriter and head of professional indemnity at Markel International, explains: “We are using professional indemnity as a lead to offer other lines of business. It has proven successful where the professional indemnity tends to be the highest premium purchase.”

He adds: “We have launched an innovative fintech product which combines professional indemnity, cyber, crime, and directors & officers and we have other products in the pipeline which work on our cross line offering.”

Stuart says Acturis has also been working in this area with its insurer partners to enable them to e-trade a professional indemnity combined product. The result, he says, is “a huge increase in the volume on professional indemnity.”

This interest and activity reflects the growing need for professional indemnity. It is no longer just professionals such as accountants and solicitors that understand their requirement for the insurance cover. 

Virtually anyone providing design or advice services needs to at least consider professional indemnity and while penetration and understanding in these newer areas remains relatively low, it is increasing. 

The rise is also being fuelled by contract requirements, particularly in the construction market. Even where individuals or companies play a minor role in a project, many have to buy substantial indemnity limits to reflect the potential impact their work could have on the overall project. 

As insurers seek to underwrite these new clients there is no shortage of capacity in the professional indemnity market and this is keeping rates in check. Desai at Markel believes that professional indemnity rates are, generally, holding flat with under-priced risks experiencing rate hardening. However, he accepts rates vary by profession and segment and highlights major construction risks and IFAs involved in defined benefit transfers as more expensive than most. 

“We have an appetite for all professions, except for valuers, primary lawyers and medical malpractice,” says Desai. “We have an established account across the major professions, but our specific risk appetite varies by territory and market conditions. Generally, we are targeting non-regulated professions, such as recruitment consultants, and excess business.”

Make sure product liability is on the agenda 

When assessing a client’s liability exposures, it is also important to discuss product liability – even though they may not manufacture anything. 

North at Towergate details: “Product liability insurance covers their legal liability for bodily injury, death or property damage arising from goods or products, whether they have been manufactured, supplied, distributed or in some way treated, altered, repaired or similar.”

However, there is also a balance to be struck and while making clients aware of a potential exposure, brokers must also be careful to explain the limitations of any policy. “Exclusions typically include liability assumed under contract, the cost of having to recall products, the failure of a product to perform its intended function, goods knowingly exported to the US or Canada and liability for professional negligence,” adds North.

One issue for brokers to think about is the potential for conflict at the time of a claim. Product-related claims can come with unusual pressures as the claimant is often a customer, according to Andrew Robinson, global special practice group leader at Cunningham Lindsey. This can create a conflict for the policyholder between their legal liabilities and their commercial responsibilities. Brokers, therefore, must balance these differing issues.

Robinson agrees that the limits to any product liability policy must be examined carefully. “There are clear limitations to a traditional product liability policy,” he says. “Examples are the product itself and costs involved in recall, removal or repair. This cover can often be supplemented by the inclusion of a financial loss extension and product recall, or contamination cover. If these policies are correctly arranged, the cover should dovetail.”

Creating an effective insurance programme also demands that brokers understand the complexities of the contractual matrix either side of the policyholder in the supply chain. 

Robinson continues: “That way roles and responsibilities are more easily defined and that assists in determining liability.”

Last year the change in the Ogden discount rate created a lot of noise in the liability market. But it is important that this does not distract brokers from all the other changes taking place in this fast-moving sector.