Premiums set to rocket in PI 'perfect storm'
Insurance broker and risk advisor Marsh has warned of ballooning professional indemnity (PI) insurance premiums created by the threat of increased litigation, falling fee income and a riskier operating environment
Back in April 2008, PI insurance providers Griffiths & Armour told the AJ that it predicted a ‘significant’ leap in the cost of insurance from the end of 2009 (see full appraisal, attached), a situation that may happen earlier according to Marsh’s survey in conjunction with New Civil Engineer.
Marsh warns that the situation is being created by the current economic conditions which has lead to increased competition for work, larger limits of liability being placed on firms by clients and the threat of court action ‘as business look for ways to avoid payment’.
The survey revealed that 56 per cent of the leading consultants and contractors who responded have experienced increased litigation aginst them and 25 per cent said the size of their claims are increasing. According to John Doe, senior vice president in the Financial and Professional Practice at Marsh, the most ‘concerning’ statistic however is that 66 per cent do not have a dedicated risk manager and a third do not have written risk managment procedures in place.
Doe continued: ‘Premium rates for consultants and contractors in the construction sector are still relatively low, due to insurer competition and substantioal capacity for PI cover. Good risk management and a more sophisticated approach to insurance broking are key to securing a better deal on PI cover.’
RIBA director of practice Adrian Dobson points out that ‘Although PI insurance premiums haven’t yet gone up, the expectation is that they will. The more immediate problem however is that premiums are based on the previous year’s trading and we know that this year levels have dropped by almost a third.’
The RIBA Insurance Agency issued the following advice in the RIBA 7 May e-bulletin (no.494)
What to do when PI premiums rise as fee income falls
Many practices experiencing a sharp downturn in work after benefiting from a buoyant construction market last year are now facing rising PI premiums at a time when income levels are in decline. The problem is that insurers base premiums on the output of previous years, which is where most claims will originate, and so will be basing this year’s premiums on last year’s figures.
RIBA Insurance Agency says that careful detailing of fee income on renewal proposal forms can help to mitigate any increases. Firstly, architects should provide a comprehensive split between different types of service and work as they will have separate influence on premium rates.
Any fees that are paid to sub-consultants or arise from work on projects covered by project policies should also be identified separately. While cover is still needed should sub-consultant or project insurance not respond, such fee income should attract a significantly lower rate when insurers are considering premiums. And fees declared should be net of VAT, and declared as such to insurers.
Other tips from RIBAIA include:
• Reconsider indemnity limits if you were required to carry cover for a project that has been aborted or delayed.
• Market test your premiums, speak to your broker or obtain alternative terms from RIBA Insurance Agency.
• Look to extend your policy for six months to defer any increased premiums.
• Ask for premium instalments.
• Consider the level of your self insured excess.
For further information or to seek a PI quotation contact RIBA Insurance Agency firstname.lastname@example.org