'Hard follows soft' in Professional Indemnity market - PI insurance

26/06/2008

The cyclical nature of the Professional Indemnity (PI) market means that hard conditions typically come following a period of relatively cheap cover and wide availability, according to the Royal Institution of Chartered Surveyors (RICS).

Sometimes conditions are hardened by disasters such as terrorist attacks or major business collapses, with RICS proposing September 11th and the Enron crisis as examples of these.

As a result of these two apparently unrelated events, the organisation notes that 2001 witnessed a particularly hardened market for PI premiums.

"It was not unusual for firms carrying out surveys and valuations to be paying a significant proportion of their annual fee income for PI insurance," RICS observes.

"As the dust settled market conditions softened and so did availability and affordability of insurance premiums," the industry body adds, noting that the last three to four years have seen "very low" PI premiums.

However, the soft market could be at an end, as RICS reports a likely increase in premiums and is already looking to take action to address this in order to prevent it becoming a major issue in the coming months.

The "credit crunch" and the deteriorating state of the housing market could prove to be the catalysts for change as many predict a deluge of related claims notifications to go against this sector.

While RICS concedes that there is now an "inevitable increase in premiums" on the horizon, it is consulting with the insurance market and promises to provide guidance to its members to help them through the "turbulent time".

Those looking to prepare for higher PI costs in advance are told by RICS to examine their cashflow and attempt to work out where the additional funds are to come from in order to meet such an expense.

Calling PI insurance "a significant cost", RICS recommends adopting a holistic approach to reducing risk across the firm as a whole.

This could be of particular importance as RICS notes that events such as climatic disasters - even on a relatively small scale such as flooding in the UK - are likely to lead to more careful underwriting procedures among insurers.

With RICS predicting few, if any, new entrants into the market, there could be little to drive market conditions towards the softer end of the scale in the immediate future.

However, the organisation does have some suggestions for those hoping to minimise their exposure to increased premiums and has compiled a list of best practices.

The use of a specialist Lloyd's PI broker, such as PYV, is recommended as part of the process of carefully selecting an insurer well suited to providing the best deal for a particular firm.

RICS adds that it is "counter-productive" to enlist the assistance of many brokers, as insurers will tend to provide a quote only to the first one which approaches them.

Claims records should be up to date and free of any errors or omissions - much like a consumer credit record, which can result in difficulty when obtaining new borrowing.

The organisation directs members to guidance from the Association of Insurance and Risk Managers (AIRMIC) which provides tips on obtaining the correct forms of business insurance.

AIRMIC lists PI cover in its "recommended" category, noting its potential benefit as it "protects professional businesses against their legal liability towards third parties for [financial] loss arising from negligent professional advice".

While the level of cover required may be set at one value, AIRMIC notes that there are reasons why individuals may choose to purchase a greater level of PI protection.

"You may decide to buy a specific limit of PI cover because it is in line with the other members of your trade association or it is the amount specified by your customers," the organisation contends.

Should the soft market really be coming to an end, now may be the time to renew cover for anyone who is considering increasing their level of indemnity, or those hoping to avoid expected, elevated costs of obtaining such insurance.

PYV are one of the UK's leading providers of professional indemnity insurance.

This news article has been produced by Adfero in collaboration with PYV and its unauthorised use is not permitted. Where this article is reproduced, PYV need to be recognised as the source of the article.

(c) 2008 Adfero Ltd.

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