After several years marked by capacity constraints, rising premiums and increasingly restrictive coverage terms, we're now in the midst of what insurance professionals recognise as a ‘soft market’ in the UK professional indemnity landscape. For financial intermediaries that have weathered the recent hard market storm, this shifting environment might initially appear as welcome relief.
However as someone who has navigated the PII sector for three decades, I've observed this pattern repeat with remarkable consistency: market cycles are precisely that - cyclical. Today's pricing relief invariably gives way to tomorrow's corrections. The pendulum never stops mid-swing.
So where does that leave financial advisers right now?
To answer that, we first need to understand the global factors influencing PI premiums, which can intensify market gyrations for financial practitioners.
Global factors influencing PI premiums
• Investment returns and monetary policy: Insurers derive substantial income from investing premium pools before claims materialise. During periods of strong market performance and higher interest rates, these investment returns effectively help offset underwriting activities, enabling more competitive pricing. When investment yields diminish during economic downturns or low-interest environments, insurers must rely more heavily on premium income, resulting in firmer pricing and more stringent underwriting practices.
• Reinsurance dynamics: Every insurer, regardless of size, requires reinsurance protection to safeguard their balance sheet against systemic and catastrophic losses. This ‘insurance for insurers’ allows them to manage their portfolios, transferring portions of risk off the books and maintain solvency. Shifts in reinsurance costs or capacity constraints - whether from major loss events or changing risk appetites - cascade through to advisers' premiums with remarkable speed, particularly given the annual renewal cycle for most reinsurance contracts.
• Cross-class impact of catastrophic events: Today's insurance marketplace functions as a deeply interconnected ecosystem. Most insurers operate as composites, simultaneously underwriting diverse risks: property in Florida, shipping in Asia, energy infrastructure in the Middle East, global cyber exposures and professional liability in the UK. This interconnectedness means significant losses in one sector or jurisdiction can trigger capital reallocation across all insurance lines as insurers reassess their overall risk exposure and pivot towards the profitable areas.
Why financial adviser PI is particularly vulnerable
Despite these global factors, financial adviser PI often bears the brunt. This is due to additional, specific pressures felt by this sector in particular. These include:
• Regulatory whiplash: The FCA's periodic focus on specific areas - DB pension transfers one year, retirement income advice the next - creates concentrated risk periods that amplify underwriting nervousness. I've lost count of how many product-specific exclusions I've seen emerge overnight following regulatory intervention.
• The PI supply-demand squeeze: Our market relies on a small, finite number of insurers with suitable expertise. Back in 2018-19, I watched several insurers withdraw from PII as a class within a few short months, creating a capacity crisis that sent premiums rocketing overnight. This supply squeeze becomes eye-wateringly expensive. Instances of premiums doubling or even tripling were commonplace - even for firms with spotless complaints records - purely because of market conditions.
• The long shadow of past advice: Unlike motor or property insurance, PI claims can emerge decades after advice was given. I still see claims surfacing today from pension advice given back in the early 2000s. This time lag confounds accurate pricing and creates particular blind spots for newer market entrants.
• Claims inflation gone wild: The FOS award limit now sits at £445,000 - a significant increase that has dramatically upped the stakes on every complaint.
• The social inflation factor: Public attitudes toward compensation have fundamentally shifted. Claims management companies have sharpened their tactics, driving both the frequency and severity of claims steadily upward. It's a world away from when I started in this industry.
Reframing PII
Over the three decades I have spent in the industry, I've seen an encouraging shift in how the most successful advice firms approach their PII arrangements.
The firms that thrive over the long term are those that have reconceptualised PII as a fundamental business asset rather than a compliance overhead. They evaluate their arrangements on total value rather than focusing solely on annual premiums.
As Warren Buffett wisely observed: "Price is what you pay, value is what you get."
This perspective is echoed by one adviser I work with who offered this compelling insight: “I wouldn't choose my compliance consultant, my platform provider or my investment research tools based solely on who's cheapest. Why would I do that with the insurance that protects my entire business and underpins client trust?”
It's a perspective that resonates with me. When you shift your mindset from “how can I minimise this cost?” to “how can I optimise this protection?”, you make fundamentally different decisions.
But there's another crucial dimension here that's often overlooked: the impact on end-client outcomes. Quality PII arrangements aren't just about protecting your balance sheet – it safeguards adviser-client trust and directly affects your ability to deliver excellent service. The results speak for themselves. Clients receive more tailored recommendations, experience more transparent complaint handling, and ultimately benefit from an advice firm that can remain focused on their needs rather than being distracted by insurance worries. By contrast, firms playing the PI market often find themselves distorting their advice proposition to accommodate whatever restrictive terms their latest bargain-basement insurer has imposed. That's neither good for business nor for clients.
So, what advice would I offer to advisers as we navigate this softening market?
Bluntly: Don't be seduced by rock-bottom premiums.
Instead, use this more benign environment to strengthen your position. Evaluate potential partners on stability, understanding of your business model and claims expertise - not just price. Consider whether your current arrangements would withstand the stress test of a complex claim or the next market correction. Build relationships with insurers who demonstrate commitment to the sector through multiple market cycles and also make sure you invest in your own risk management to qualify for recognition and premium benefits.
I've watched countless firms chase short-term premium reductions only to face painful corrections when market conditions inevitably shift. The firms that successfully navigate multiple cycles are those that view PII strategically, seeking stable partnerships that provide consistent protection regardless of market conditions.
After thirty years on this merry-go-round, I'm convinced of one thing: the path to long-term success rarely follows the lowest-price route. It comes from building partnerships with providers who understand your business, recognise your quality, and remain committed through all market conditions.
In short: If you're not paying the proper price for a product, you are the product. The current soft market offers a valuable opportunity. So, use it wisely.
