Problems of price and accessibility in the PI cover market will persist because of underlying factors such as market rebalancing by reinsurers in the wake of 9/11, increasing regulatory demands, and issues of "moral hazard" according to consultants to the industry.
The comments have been made at a roundtable organised by the Centre for the Study of Financial Innovation.
Ray Brown of Marsh, and Steve Gilbert of – risk management and reinsurance services firms - both pointed out that solving the issues facing those businesses struggling with PI is difficult because often the causes are global in their nature.
For example, while events of 11 September 2001 did not cause the imbalances in underwriting supply, it was certainly a catalyst for what subsequently happened as providers looked over their assets and potential liabilities.
The result has been that insurers found it more difficult and more expensive to obtain the cover their clients required, says Steve Gilbert .
”Products that were too cheap became too expensive, while the industry is now trying to find a balance again,” he says.
Additionally to that, those in financial services often require specialist underwriting. Because of aggregated liabilities due to exposure not only to business risk, but also regulatory demands for insurance on the part of end clients, such as investment banks, actuaries and accountants, underwriters themselves find it difficult to offer prices, coverage and availability being sought.
The insurance industry is also dealing with a shift in the way professionals act, with more inclination to take solutions to clients rather than waiting for clients to come to them for access to solutions.
This shift is partly seen in the increasing importance of so-called moral hazard as a risk factor – for a definition of moral hazard, think of what happened at energy trading firm Enron, where both senior and junior executives engaged in massive fraud.
Along with moral hazard, increasing regulation means pricing pressure is only going to be in one direction, and that is towards more expensive cover.
Speaking of the Australian experience of PI cover following the spectacular collapse of HIH, one of the biggest business insurers there, Ray Brown has noted stricter regulations pertaining to capital balances have created other problems in the market.
If affordability goes down, then end customers of professional services providers may in fact suffer from a restriction in access to the services required, as smaller firms are unable to afford cover.
Mutual insurance schemes, such as the one operated by the Law Society and ship owners in the UK, may be an answer to the cost issue, but they raise other issues in turn, such as whether they too suffer from undercapitalisation.IFAonline
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