PI insurance Premiums are creeping up and businesses are seeking ways of minimising costs. Emma Vigus offers advice
Premiums for many surveyors are competitive. However, firms that carry out valuations may pay as much as 25% of their fees in professional indemnity (PI) premium. This follows a steep rise in the number of claims relating to allegedly negligent valuations and a subsequent reduction in the number of insurers that are willing to provide cover.
Insurers are handling a high volume of claims relating to residential valuations and originating from the more financially stable lenders (see EG 25 September, p104). The level of claims yet to materialise in respect of commercial property and from sub-prime lenders remains uncertain. Until this uncertainty dissipates, premiums are likely to continue to rise. Although new insurers are entering the market, they will provide cover only on a selective basis.
This article advises firms that earn more than 15% of fee income from the valuations on how to secure PI insurance at an affordable price.
Case study
The firm seeking insurance focuses mainly on providing trading valuations, centred on property, for lending purposes. Established in 1992, the core team has worked together for more than 15 years and offers national coverage, concentrating on the healthcare, education, leisure and retail sectors, among others. The firm’s focus on valuations for lending purposes represents a potentially significant risk to insurers, despite the firm having had no settled claims against it.
In response to steeply rising PI premiums, the directors elected to review their broker relationship before the 2010 renewal. They approached a broker on the recommendation of the RICS and, having ascertained the broker’s knowledge and understanding of the surveying sector, appointed it, six weeks ahead of the renewal date. The firm required cover of £20m with the lowest possible excess.
Having developed a solid understanding of the business, the broker arranged for the firm to approach several insurers, first working with the directors to help them to develop a presentation that highlighted their approach to risk management. The presentation emphasised:
? the efficient co-ordination of in-house systems to control/monitor the caseload of individual valuers;
? the firm’s focus on niche sectors;
? its mid-tier pricing policy;
? the strength of the firm’s conditions of engagement and excellent claims record;
? director-level involvement in all valuations;
? all lenders are recognised brand names with a long-standing association with the firm; and
? the firm’s evident compliance with RICS guidelines and its adherence to specific client panel agreement and instruction requirements.
For larger businesses, a face-to-face meeting with insurers can be crucial in ensuring that the insurer accurately prices the risk. It also provides an opportunity for firms with a record of strong risk management to differentiate themselves from less rigorous counterparts.
The broker approached six potential primary insurers. These were selected on the basis of their ability to demonstrate an underwriting philosophy that recognised variations between individual firms, rather than applying a blanket underwriting approach to specific sectors. The insurance was ultimately placed with four insurers, at a saving of 20% against the previous year’s premium, and a £40,000 excess was secured, representing a significant reduction on the previous figure.
Although firms that carry out valuations for lending purposes must be prepared for high premiums, the case study demonstrates that it is possible to obtain a positive result at renewal if a few key steps are followed (see below.) These suggestions vary in importance, but the failure to commit sufficient time, energy and planning to the renewal process may mean that the firm will be unable to obtain cover. If this happens, the firm will have to apply for entry to the RICS assigned risk pool, where premium will be equivalent to 25% of fee income and cover will be offered on an aggregate rather than a one-claim basis.
Efficient insurance buying
? Firms should allow at least six weeks for renewal; larger firms should allow three months. If the proposal form has not been received within those timeframes, the broker should be chased or another used.
? PI insurance is a specialist product and best results will be obtained by a specialist broker. If its knowledge is in doubt, a firm should ask it for an update on market conditions and an explanation of which markets it will approach and why.
? It must fully understand non-standard procedures that are in place to mitigate risk: for example, ISO9001 accreditation.
? It may be tempting to contact a number of brokers; but this can militate against obtaining competitive terms. Two specialist brokers should be sufficient.
? The person buying insurance must know how to run the process and how to achieve the best price from a broker; failure can be expensive – the premium could be twice what it should be.
? It is advisable to ask two brokers to quote once every three years; loyalty is good, but brokers can become complacent.
? A good broker will advise on how to present risk to insurers; if the premium exceeds £50,000, ask to meet insurers.
? The proposal form must be accurate and neatly completed; a poor form reflects badly on a firm. Include supporting information – copies of standard contracts, detailed explanations of any claims and unusual pieces of business.
? The broker must have a strong claims-handling team. The real test lies not only in its ability to obtain the best terms at renewal but also to handle a claim effectively that is the point of insurance.
Emma Vigus is head of new business at Howden Professional Risks
