A split in RICS thinking is developing over the sensitive issue of professional indemnity insurance and how to handle the dramatic increases in premiums experienced by practices over the last two or three years.
While mainstream RICS thinking seems to favour the “masterplan” approach — all members throw in their lot with one insurer in the commercial insurance market, giving strength in numbers and economies of scale — the RICS’ central London branch favours the “mutual” approach. That would mean that a consortium of members would take their collective risk upon themselves, perhaps going to the insurance market to re-insure the “top slice”.
Whichever path is chosen it is clear that events, and insurance premiums, are no respecters of the committee decision-making process.
Already a number of firms are believed to be taking matters into their own hands and going down the mutual path because of the enormous costs of professional indemnity insurance already being incurred, combined with the difficulty in obtaining insurance at all.
Most medium-sized firms are believed to be paying a six-figure premium; for what is these days a comparatively modest cover, £20m, the premium could be between £85,000 and £100,000. RICS figures indicate premium increases averaging 56% last year and 190% in 1985.
Ian Oddy of St Quintin, who is chairman of the RICS working party on professional indemnity insurance (PII), says that there is a “difference in emphasis” but that no irrevocable decisions have been made in either the mutual or masterplan camp (Central London Branch and RICS respectively), and he said that the recommendation of the working party on PII was that the masterplan should be considered but that it is not the only option.
Ian Oddy believes that the Central London Branch view is tenable but does not necessarily concur. He says that one of the reasons for picking that option is that it seeks to avoid paying various tiers of commission to underwriters, brokers etc, and that it is claimed to reflect the actual cost of claims received. Against it is the possibility that if the mutual fund is not as great as the claims against it, its contributors have to put their hands in their pockets to make up the shortfall, and may well need to dig deep.
Under the master policy the RICS would take the whole institution’s business to the insurance market and one premium would cover all the risk. This premium would then be apportioned pro rata depending on each individual’s, or firm’s, exposure.
One of the potential problems of the master policy is seen to be the level of compulsory indemnity insurance now required by the RICS — an inherently arbitrary £1/4m. For individuals it may be inappropriately high, for large firms it falls far too short. Some doubt that the masterplan can cater for this range of needs. A large firm that wants an exceptionally high level of cover might still have to go to the (narrow) PII market to cover that “top slice”.
Shortage of information on the actual level of claims and premiums paid is making the choice of direction harder.
Alan Musto of Montagu Evans, who chairs the Central London Branch committee on PII and is on the RICS working party, says that members ought to be more open. And he says that the fact that firms are “doing their own thing” makes the RICS’ position more difficult in establishing a centralised master policy or mutual fund.
