Professional Indemnity Insurance – the current situation and why it needs to change
What is Professional Indemnity insurance?
Professional Indemnity Insurance (or PI) is a vital cover for any business that offers services or advice to clients because it protects against any alleged inadequate provision. This insurance covers legal costs and expenses incurred in the course of defending a claim, as well as any compensation due to a client – it can help to protect your finances, your reputation, and ultimately your business in a crisis.
Why is Professional Indemnity insurance a problem child?
Professional Indemnity insurance is traditionally a fickle beast, with clients never entirely sure what will be on the table at the time of uptake or renewal.
The PI insurance market suffers from regular fluctuations driven by demand and supply, a classic economic problem. It’s been typical to see insurers oversupply cheap policies, a short-term approach which sees demand drive down prices even further. This is not viable in the longer term because margins are not high enough to provide a sustainable solution (there needs to be enough money in the pot to pay out on any claims). As a result, these policies are then withdrawn, which in turn sees prices rising.
This classic commoditisation leaves a lack of consistency for the client, resulting in a decline in trust and a poor perception of insurers.
Securing Professional Indemnity insurance has become a challenge for many businesses. Premiums are rising and policy availability has reduced as fewer insurers look to take on this risk; and for those that are willing to offer PI, underwriting terms have become stricter.
This is a real problem for some professions where PI is mandatory. Some businesses have been forced to close because a lack of available insurance and others have been unable to get started at all. Insurers have lost the trust of their customers because they are seen to react quickly to situations that pose a risk, withdrawing cover sometimes the very next day.
Examples of industries that have encountered issues in securing PI include those in the construction sector. The effects of Grenfell and the ensuing building safety crisis has resulted in a shrinking market and increased premiums. Independent Financial Advisers have also struggled to get PI cover because of changes to the Pensions Scheme Act and negligence claims.
According to a recent article in Insurance Post, even sectors in perceived ‘growth markets’ are experiencing caution from insurers. They reported that cover limits for IT and tech firms have halved over the last 12 months, typically from £10m down to £5m.
Contributing factors have even come from within the insurance industry itself. COVID 19 is a good example of this and has had a considerable impact on some insurance policies such as business interruption. Many businesses have claimed on their BI cover during the pandemic; sometimes against the broker’s own PI policy, if they failed to explain recent changes, renewed a policy without fully explaining cover, or gave poor advice. This has resulted in BI terms becoming stricter, with caveats and exclusions added by insurers.
According to Nic Brown, Markel UK Sales and Marketing Director, who recently spoke at the British Insurance Brokers’ Association (BIBA) conference*, prices have gone up over the last twelve months when most businesses have been financially challenged, which has created a bit of a perfect storm.
Thankfully, the industry does recognise that the inability to provide cover for customers that want it, is a major problem!
A time for change
Panellists at the recent BIBA conference called for change and spoke of a desire to see insurers and brokers collaborating to bring back value for customers. Focusing on the challenges of the PI market they stated that insurers need to offer consistent coverage and prices. This is good news but should come with the caveat that the very best solution for you, may not necessarily be the cheapest!
The new approach will see insurance companies and brokers focusing on the financial security of the insurer longevity and commitment. This is the knowledge and reassurance that the insurer will be there for the long term and is unlikely to change or withdraw cover, which will be a significant factor in policy recommendations, along with service standards and the willingness to pay claims.
Claims basis advice
Another area that insurers are looking at to help the PI market and its customers, is the claim basis of a policy. There are two types of claims basis available – ‘claims made’ and ‘claims occurrence’.
Insurers and brokers can assist customers more effectively by offering more advice around the policy claims basis. Prudent advice will ensure the customer has the right claims basis for their needs.
The majority of Professional Indemnity policies are written on a ‘claims made’ basis. This means that you are only able to make a valid claim against your policy within the period of cover – usually a year. So, if you have a policy dated 2021 – 2022, you will only be able to claim within this timeframe.
If something occurs outside the valid policy dates, or you forget to make your claim within the cover period, your claim will be invalid.
Claims made policies tend to be the cheaper because they only cover you for the stipulated period of the policy.
Claims occurrence policies are different. They are written to cover your business against an event. This adds flexibility and means that you can take action at any time after the event has happened.
For some professions, a claims occurrence policy can be highly beneficial, such as doctors consulting outside the NHS, architects, dentists and solicitors. Issues often arise many years after advice has been given or work has been completed, so this policy basis offers financial security for many. Due to the longevity of the policy, these are of course, significantly more expensive.
It gets more complicated when we add that claims made policies do have an element of flexibility. Retro-active dates can be included in a policy to cover previous work, but the limitations are that they again, would only be valid for the term of the policy. An example here would be practising dentists and doctors who have worked outside the NHS; they can add in retro-active dates to cover prior work. And for those that have retired, ‘run-off’ cover can be purchased to protect against work and advice given in the past.
Insurers and brokers need to take the time to clearly explain the benefits of each claims basis and ensure that the right and most appropriate advice is given to their clients. An annual policy on a claims made basis might appear to be a good and relatively inexpensive solution but by working more closely with clients and gaining a greater insight into their unique situation, a claims occurrence policy might actually be more effective in the long term.
As a business purchasing PI you can expect to enjoy a closer, more authentic relationship with your insurance provider!
What to look for in a sustainable and reliable PI insurer
An insurance company with an A rating is always desirable. This is effectively a credit score system for insurers and helps to indicate that the insurance company is more likely to honour the terms of its policies. Other factors to help identify a suitable insurer may include evidence of its willingness to take on more PI business, and the number and scope of the PI policies it makes available. An insurer may be able to demonstrate commitment through investment such as improved trading systems, which make the relationship between insurer and broker easier and more efficient. Evidence of investments in people, both internally and externally, can demonstrate a commitment to the longer term and comprehensive claims support may also be a key indicator. Finally, consistency in pricing (away from the fluctuations seen previously) and how products are delivered will help to identify sustainable insurers.
Of course, we recommend using a reputable broker who can find the right insurer for your Professional Indemnity needs!
We place the customer at the heart of everything we do – it’s part of our company ethos. We welcome the call to insurers to do the same and are excited to see the appetite for PI increase with more stable premiums, which will allow us to help more of our clients protect their businesses.
As an independent specialist broker, we look across all our A rated insurer partners to find the best solution for your business, providing impartial honest advice on what we believe will be best for you now and for the future.
We provide a truly personal service for our clients and always aim to arrange face-to-face consultations (restrictions permitting) and reviews. Partnering you with a dedicated account executive allows a close and trusted relationship to develop, so together we can explore the potential risks you face and build tailored insurance programmes to mitigate risk as effectively as possible.
*as reported in Insurance Post