The Insurance Market.
There have been notable changes in market conditions for the Professional Indemnity Insurance (PII) industry over the last year. In this article we will explore the factors causing insurers to leave the PII sector and give advice on how best to approach your renewal to get the best possible terms.
For the first time in many years the insurance market started to ‘harden’ in 2018. It began with the intervention of Lloyd’s of London, following a review which highlighted the poor financial performance of PII underwriting generally. Non-US PII was the second least profitable class of insurance at Lloyd’s, who have since stated that growth needs to be secondary to performance. Consequently, many of their syndicated were told to write less business whilst they address their deteriorating loss ratios.
As a result, several syndicates withdrew from the PI market altogether. Unfortunately, the remaining insurers have little desire to write more premium in 2019, while others are increasing rates and/or limiting their capacity, which is creating an uncomfortable environment for many firms and brokers trying to obtain PI cover.
Whilst valuation work accounts for a small proportion of the activity carried out by surveyors, historically this has been the most claims intensive area and losses from valuations for lending have always been a concern. Insurers are still experiencing claims in this area and a potential for fallout in the property market as a result of Brexit is also on the radar.
In addition, PII has what we refer to in the insurance market as a ‘very long tail’. This is because claims can be slow to develop and emerge, meaning it can be some time before an insurer can have certainty regarding the level of loss on an underwriting year. As you can imagine, this creates a challenge for insurers managing their pricing strategy for this sector; if cover has been under-priced over a number of years, then the accumulating losses can ultimately lead to an insurer having to withdraw from the market.
Hope for the future
Although we are currently facing a difficult period, the steps insurers are taking now will eventually reduce the losses and gradually improve the overall profitability of the PII market. As additional capacity is attracted back to the market, we can only hope that conditions will begin to soften.
The renewal process
However, it will be sometime before we see insurers enter back into the sector and increased insurance capacity. In the meantime, surveyors have to stay in business and find insurance. So, what steps should you be taking if your renewal is due?
The days when you could simply phone up your friendly local broker a few days before your policy was due to renew and have your renewal through within a few days are long gone. Now you need to start your renewal process early.
As the market hardens, insurers can and will insist on more information. Proposal forms won’t be a five-minute job and will take time to complete. This is particularly true if your existing insurers have left the PI market. In that situation you will be forced to find a new insurer and may struggle to obtain even an extension or run-off cover. If you believe your insurer is pulling out of this market, it is essential that you plan ahead.
Internally, you should be preparing for your renewal date 4-6 months in advance. This allows enough time to collect and correlate the information for your submission including updates on your current claims from your previous brokers and/or insurers.
Depending on the size and complexity of your organisation’s profile, we recommend that you present your renewal submission to your broker three months in advance of your renewal date and no less than two months in advance.
Your existing broker should give enough notice of any such issues and if they do not, you should try to keep a regular dialogue with them or consider changing brokers. We find the most common complaint from new clients is that their previous broker suddenly increased the premium or has no availability of cover close to renewal.
If you engage more than one broker, ensure they put in writing the markets they plan to approach before you send either broker your submission. This is because insurers do not react favourably to seeing a submission from more than one broker and, with limited insurers prepared to write firms with surveying and valuation for lending exposure, most brokers are likely to approach the same insurer.
If multiple brokers do put forward the same insurers, then you should consider which broker has the strongest relationship to get you the best terms. You’re entitled to request they evidence why they are best placed to be your broker of choice and it is worth asking whether their access to the Insurer in question is direct or via another broker.
Top tip – avoid a broker who offers you a premium saving without having seen your submission!
From my experience, those who come to us distressed because they are struggling to obtain a renewal are struggling because of a poor-quality submission and broker.
The proposal form
It’s vital that the information provided on a proposal form is comprehensive and professionally presented:
• Type it, don’t write it – if your presentation looks professional, insurers will take you more seriously. If you are unable to type your responses on the form, ensure your handwriting is legible. If a box is too small to fit the information, add an appendix.
• Complete the form – if a question is not applicable, write “Not Applicable” rather than leaving the box blank as this may lead to your broker or potential insurer being unsure if you’ve forgotten to complete a section.
• Fee split/activity breakdown – ensure this breakdown adds up to 100%. You may be surprised by how many submissions do not.
If your fee income has increased or decreased, it is advisable to include an explanation in a covering letter as part of your submission.
If, for example, your fee income increased as a result of charging higher fees for your services, an insurer may assume your exposure has increased as you are carrying out more work, as opposed to carrying out the same amount of work, but charging more for your services. A good broker will argue that increased income should not affect the renewal quote as the level of exposure has not changed.
If your fee income has decreased, you should clarify why that is. Perhaps you had a large, one-off instruction that’s unlikely to be repeated so clarify any anomalies that could be questioned by an insurer.
You can help to make the process run as smooth as possible if you are clear and concise.
If you carry out valuations for lending, provide a breakdown of valuations by property value. This helps insurers to better understand their exposure. For example, list the number of valuations you carry out for properties valued at GBP0-GBP500k, then GBP501k-GBP1m and so on.
Splitting out your business activities also helps your broker and insurer better assess the areas of exposure in which you carry out work. For example, if you carry out Home Buyer Surveys excluding valuations make this clear.
If you work with panel managers, let insurers know who they are and the amount of valuation for lending work that comes from them. Since panels usually provide a form of quality assurance this may help to reassure the insurer. This also applies to lenders – let insurers know where your fee income comes from.
Loan to value
Whilst most proposal forms will ask if you know the LTV on the instructions you receive, it is important to expand on your internal processes regarding qualifying the type of valuations you will or will not accept and if you will only take instructions for lending under certain LTV.
When calculating a premium, insurers usually look at a firm’s valuation profile for the past 6 years. If you can establish a mortgage valuation you have carried out has been redeemed or you can evidence a property has been re-sold since your valuation, the likelihood of your valuation leading to a claim may reduce. Websites such as Rightmove and Land Registry can be useful for obtaining this information. This might take some time and require a certain element of ‘forensic’ work, but it will re-assure insurers greatly if they can understand the level of exposure they have.
Tell your insurer what work you turn away
You should also notify insurers if you turn down instructions because it falls outside of your expertise or because you are unfamiliar with the lender, for example. This shows the insurer that you look to mitigate risk for not only your firm, but for them also.
One of the most important aspects in your submission is providing a clear and detailed claims history.
A well written claims commentary should always contain your perspective on liability as well as your views on how the claim came to exist in the first place. It should also include the measures you have implemented to mitigate against the same thing happening again.
Insurers understand that claims happen. However, they want to see evidence of any lessons learnt from past claims, where applicable, to avoid a repeated claim in the future. If you have received multiple claims from a specific lender or client, or against a specific surveyor, conduct a review of other valuations or work done around the time to see if there may be any other concerns. This demonstrates a proactive approach to insurers and that you take risk management seriously.
Private appointments and new clients
When taking on a new client, it’s important to carry out due diligence. We have seen many claims coming from smaller firms who accepted just one instruction from a client that was new to them. When asked why they accepted the instruction, many advise the fee was too good to turn down. We often find that if something seems too good to be true, it usually is. You’re entitled to ask questions so don’t be afraid to ask a new client who else they have approached before coming to you because you may be one of many. This could be a sign that, potentially, the job may not be worth the risk.
We encourage our clients to include a letter or note setting out the qualities of their firm which may not emerge from the answers on the proposal form.
Be concise – put yourself in the shoes of your insurer and focus on issues that are likely to make a difference. For example:
• The culture within your firm
• Risk management initiatives within the last twelve months
• Specialisms within the firm
• Details of higher risk areas of practice that are made lower risk in your firm, and why.
How your PI cover could be affected by a hard market
In general terms, a hardened PII market means higher premiums and a reduced choice of insurer. When capacity is reduced, there is a direct impact on competition. Less competition means the remaining insurers have more ability to dictate terms and they can be more selective as there are fewer alternatives available to insureds and their brokers. The more selective approach does not just affect premiums – coverage provided by insurers may also be reduced. This can manifest itself into several different areas:
• Reduced Limit options and or changes to the Limit of Indemnity basis
• Additional Exclusions, particularly in respect of fire safety or cladding
• Removal of additional clauses that are broader than the RICS minimum terms and conditions
• Increased retained risk, with insurers looking to increase the self-insured excess under your policy.
We have seen several firms requiring dispensation from RICS for the terms they have obtained, along with firms looking at reducing their total Limit of Indemnity and/or consider diversifying their business activities, and in extreme cases, looking to exit carrying out valuations for lending. Here are some points you should consider:
• Ceasing to carry out valuations for lending will not have an overnight effect on your PI premium as insurers will still have the exposure of any work you carried out for a minimum of 6 years
• Reducing your Limit of Indemnity to achieve a cost saving may result in you breaching any terms of engagement you have entered into with a client where you confirmed you would maintain a specific Limit of Indemnity. Ensure you check the level you have capped your liability at in your valuations or agreements with clients and lenders.
At present RICS require a firm to have a Limit of Indemnity on an Any One Claim Basis and it is the primary £1m where most of the premium is focused, being the layer that is the most vulnerable to claims. This has caused insurers to look at changing the basis on which they offer terms. You may come across some terminology when you come up to your renewal. The most significant to date has been insurers offering revised Limit Basis, commonly known as an “Aggregate Limit” or an “Aggregate with unlimited re- instatements”.
“Aggregate”, in simple terms, means the total Limit for which insurers are liable for in a policy period, including legal costs and expenses. Once the Limit has been exhausted, the firm will have no further protection. For example, if you have £1m in the aggregate Limit and you were to have a claim worth £1m, and then a claim for £500,000, you will be liable to pay the £500,000 from your own pocket.
Over the years, the aggregate limitation has been mitigated by the availability of automatic reinstatements being offered, which is often referred to in the market as “Aggregate” with “Round the Clock” unlimited re-instatements. This Limit of Indemnity is effectively the same as “Any One claim” cover and only works if you have Excess layer policies that sit above your Primary Policy.
While rates have hardened and some insurers have reduced their appetite, there is still capacity in the PII market.
Our best advice is to stay informed, plan ahead and present a professional proposal. If you are business planning for next year, allow for a likely increase in insurance premium no matter how good your claims history.
And remember, getting the best deal is always a team effort between you and your broker, so ensure you maintain contact and respond to additional questions your broker and insurer may ask of you. If you feel your existing broker may not be presenting your case as well as they could be, consider changing brokers, but again – don’t leave this to the last minute.