Professional indemnity: state of the insurance market
Time will tell
14 October 2016
Emma Vigus discusses the state of the insurance market
Although the majority of RICS-regulated firms have for the past decade enjoyed access to competitively priced professional indemnity (PI) insurance, it has been a very different experience for organisations that provide lending valuations. Enough has been written about the torrid PI insurance market conditions over the past 6 years, but on a positive note, new notifications against valuers have fallen considerably.
That is not to say that all the claims arising from the last economic downturn have just disappeared. Insurers continue to deal with more complex matters resulting from valuations carried out from 2007 to 2010, particularly those related to commercial valuations. Given the length of time taken to resolve these, legal costs are racking up and can often end up being disproportionate to the value of the original claim. These all add to the already substantial bills that insurers are dealing with from the past 6 years.
Enough has been written about the torrid PI insurance market conditions over the past 6 years, but on a positive note, new notifications against valuers have fallen considerably
While costs continue to mount, many insurers are less concerned about the claims that could still arise from historic work now that the full impact of limitation is being felt and property prices across much of the UK have returned to pre-2007 levels. This has led to an increase in competition among insurers, with at least 8 willing to consider providing a primary quote for firms undertaking valuations for lending – compared with no more than 5 a year ago. The increase in completion (or capacity as it is known in the insurance industry) has resulted in a reduction in insurance rate, with most firms benefiting from stable premiums at renewal against a backdrop of rising fee income.
Daniel Prince, Head of PI at Hamilton Underwriting, says:
"For those firms demonstrating a strong or improving claims experience, rates are certainly not going up. The general trend appears to be a reduction in notifications and this will help to attract new insurers to the space, which will aid competition in pricing – assuming economic conditions remain as they are now."
The increase in insurers' appetite will not apply in equal measure to all firms undertaking lending valuations. They remain wary about firms with claims records that do not benchmark favourably against their peer group, irrespective of the work undertaken, and demand for firms undertaking commercial valuations remains limited. As always, insurers' penchant for smaller firms, typically those with a fee income of less than £2m, is also restricted, because relatively low premiums make it harder for insurers to amass sufficient premiums to settle an influx of claims.
In an increasingly competitive insurance market, preference and pricing models will vary from insurer to insurer, so the quote received from one can differ significantly from that received from a second
In light of the significant losses of the past few years, insurers continue to be very diligent when it comes to selecting which risks they want to underwrite. This is evidenced by the volume of information required at renewal and the scrutiny surrounding risk management, with the latest hot topic being client selection: basically, how you decide who you want and who you do not want to work for.
Insurers also continue to be very nervous about firms working beyond their traditional areas of expertise. Prince comments:
"We see plenty of claims arising from firms operating outside their normal remit and we do not expect this to stop. We have seen claims from firms dabbling in houses in multiple occupation, properties with short leases, development work, bridging loans and many other areas where really they should have said 'no' from the outset. Knowing which work and clients to refuse at the start is still one of the best risk management tools."
Pricing remains very competitive for businesses that buy excess layers, as it does for all activities outside of survey and valuation. In an increasingly competitive insurance market, preference and pricing models will vary from insurer to insurer, so the quote received from one can differ significantly from that received from a second. As an example, the quotes from more long-standing insurers of the sector, who have been hardest hit by the losses, may fluctuate widely compared with those applied by newer insurers, who are more likely to quote aggressively to help them establish a quick foothold in the surveying category.
For those firms that wish to remain loyal to their existing insurers, a good broker should be able to balance variations in quotes between established and new insurers through effective negotiation. The variation in demand highlights the need for firms to ensure that their broker is seeking terms from as many insurers as possible at renewal.
Self-insured excess levels remain broadly flat, although in an improving insurance market firms would be well advised to review this situation, given its ability to have a significant impact on the balance sheet in the event of a claim.
"I would not expect firms to secure big reductions but it never hurts to ask. Property prices are increasing and therefore the potential severity of claims will increase, meaning insurers will value the protection provided to their own balance sheet by a firm's self-insured excess."
Based on the experience of the last 3 economic cycles, we would expect the status quo to hold until the next time the UK property market falls off a cliff. It is only then that we will totally understand whether the reforms made by Lord Justice Jackson, valuer registration, general improvements to risk management and increasing use of technology have really made a difference in terms of their ability both to prevent and to defend a claim.
On the potential impact of another economic downturn, Prince comments:
"Eventually interest rates will rise, repossession rates will increase and lenders will once again look to recover their losses from valuers, solicitors and others involved in the property purchase process. At this time we will see the real benefit of improved risk management and technology.
"My personal feeling is that the number of successful claims will decrease but the value of successful claims will be higher. The real test of an 'improved' risk management policy is when the claims come in. It is then you discover whether it has been applied as robustly as it should have been. I foresee a good number of client meetings in the future where we have conversations that start: 'Our risk management policy was in place, but on this occasion …'."
Emma Vigus is Director of Howden Professional Indemnity
Related competencies include:This feature was taken from the RICS Property journal (July/August 2016)