Professional indemnity insurance: anticipated trends
Thinking about the year ahead
11 June 2015
Emma Vigus considers anticipated trends in professional indemnity insurance for RICS-regulated firms
Many RICS-regulated firms will have benefited from improved activity levels across the property and construction sector over the past 18 months. This is encouraging news, but what impact will the return to comparative prosperity have on the availability and price of professional indemnity insurance (PII)?
The message regarding the cost and availability of PII remains positive for those firms that are not involved in providing surveys and valuations at the point of a transaction. There has been only a marginal upward trend in claims activity so premiums remain competitive, with multiple RICS-listed insurers prepared to battle hard to win good-quality business and new insurers entering the market with an aggressive appetite for businesses perceived to represent a low risk.
Although rarely encouraged by either brokers or insurers, firms not involved in providing surveys and valuations (either now or historically) should shop around to ensure that they are benefiting from the best available insurance rates and policy coverage.
Despite favourable insurance market conditions for non-surveying and valuation (S&V) firms, businesses of all types should keep a close eye on their contractual obligations as clients become increasingly demanding. This applies particularly to those firms operating in aggressively cost-conscious sectors such as high street retail and the public sector. Additionally, in the light of recently challenging economic conditions, firms that subcontract work must take steps to ensure that their contractors are financially stable and maintain adequate PII cover.
Given an increasing focus on the environmental credentials of property, RPC, in its annual insurance review, also anticipates a rise in the number of green construction claims, stating: 'New technologies and products are not always proven and are less likely than established products to be successful. Companies, particularly start-ups seeking to exploit the market, may not have sufficient experience to design, inspect or construct the new technologies. Contracts are unlikely to have been tailored to protect contractors against the risks of innovative products that are not guaranteed to work and all this is set against a background of constantly fluctuating political pressures, guidelines, regulations and subsidies.'
The past 3 years have seen a move towards greater information sharing, particularly in the residential sector
For the S&V sector, insurer appetite remains limited, with PII rates and accordingly premiums continuing to trouble many surveying businesses. Although Howden data shows a noticeable reduction in new notifications, there remain a large number of unresolved claims relating to work done between 2006 and 2010. Given the time lapse, those matters yet to be settled are often complex and costly.
The recent case of Titan vs Colliers is a perfect example, representing the first time a UK court had dealt with a negligence claim brought by a Special Purpose Vehicle established for the purposes of a loan securitised against a portfolio of commercial properties. Law firms acting for claimants are using the Colliers case as an opportunity to actively encourage balance-sheet lenders to pursue surveyors as a way of generating investment returns; PII insurers will remain understandably nervous about removing reserves from matters that may have been dormant for several years, even where they may be considered time barred.
Insurers that have continuously supported valuers over the past 6 years are pushing hard for PII rate rises or deciding not to offer renewal terms. Encouragingly, however, a number of new insurers are beginning to show an increased appetite for valuers, as evidenced by the recent launch of the Howden PII facility, which is jointly underwritten by a panel of 5 RICS-listed insurers. This appetite is often extremely selective and will frequently only be sparked by an informed insurance broker presenting a business that is demonstrably stronger in terms of risk management than its counterparts.
Carly Butters, Professional Indemnity Underwriter at CNA Hardy comments: 'As with all professions, firms that can demonstrate strong internal risk management procedures are far more attractive to underwriters. This is not about merely evidencing compliance with RICS requirements, it is about seeking out the firms that go above and beyond and those that can demonstrate that their business culture actively encourages adherence to process in favour of chasing the pound.'
While the decline in notifications and a steady improvement in insurer appetite might point to a rosier future for valuers, the industry must ensure that the 2006-09 lapses in risk management are not repeated and that when the next property downturn hits, surveying firms can provide a robust defence to the inevitable influx of claims.
Daniel Prince, PI Underwriting Manager at Barbican says: 'Looking to the future, I am increasingly concerned about firms doing work for new lenders without undertaking any due diligence. This applies particularly to smaller businesses not receiving instructions from high street lenders or via panel managers who will struggle to find the time to complete a thorough due diligence exercise.'
More new lenders are entering the UK market, often with very aggressive lending targets, he adds. 'Hopefully, the Mortgage Market Review (MMR) will have a positive impact on lending practices. I would question the stringency with which MMR will be applied in an organisation where the desire to win new business may take priority over consistent regulatory adherence.
'My concerns would be heightened if the lender was providing higher risk securitised products, e.g. buy-to-let mortgages. Surveying firms and panel managers thinking of undertaking work for new lenders must ensure that they carry out due diligence on the lender.' He believes this should include gathering information on:
- the types of loans offered;
- typical loan to value ratios
- attitude to higher risk borrowers, for example, the self-employed and those with County Court judgments
- the management and underwriting team;
- a thorough review of the contractual terms, particularly clauses relating to turnaround times, fees and penalties
- management’s history of bringing negligence allegations against surveyors.
Butters is positive about the increased use of technology in the valuation sector. However, she remains concerned about the more fundamental facets of risk management, specifically highlighting a lack of supervision of surveyors operating from remote locations and the impact of surveyors operating outside their area of expertise.
A lot of the information to which Prince refers will not be publicly available, which highlights the increasing importance of valuers maintaining an open dialogue with their peer group, the insurance industry and panel managers. Encouragingly, the past three years have seen a move towards greater information sharing, particularly in the residential sector with a number of cross-sector forums providing early warnings of emerging risks.
The insurance industry is also waking up to the value of data, so a future where data on claims trends becomes more readily available can be anticipated. This should in turn make it easier for firms to take an informed view on the work they do and do not want. There is undoubtedly more that could be done, particularly in terms of data sharing between lenders, surveyors and insurers. However, increased transparency across the residential sector is certainly one of the developments in terms of PII and risk management that should be celebrated.
Although insurance industry commentators have long been calling for a wholesale rise in PII rates across all professions, the continued influx of new insurance capacity provided by investors looking to improve on the returns offered by more conventional investment vehicles seems set to continue. As long as this trend prevails, rates for lower risk, non-S&V firms are unlikely to move.
On current evidence, 2015 should also herald the stabilisation, and in some cases the reduction, of insurance rates for good-quality residential S&V firms. For firms involved in commercial property, a lot will depend on the cost to insurers of claims that remain unresolved and insurers will be waiting with bated breath for the result of the appeal in the case of Titan vs Colliers (due to be heard in October 2015). Currently, commercial firms may have to wait before they benefit from the increase in insurer appetite that their residential counterparts are beginning to enjoy.
Irrespective of insurance premiums, the message for all professional services firms remains unchanged: deliver good-quality work and be prepared to prove this to a judge.
Emma Vigus is a Director at Howden Insurance Brokers