In the current hard insurance market, premium costs are a greater consideration than ever for clients when it comes to their professional indemnity (PI). Clients often ask us: “How do PI underwriters calculate their premiums?”. There are a number of factors taken into account by an underwriter when it comes to considering premium costs.
Underwriters all abide by their respective underwriting criteria/appetites. If you were to send a risk to ten insurers, it would not be surprising to receive ten very different responses back, due to the nature of how PI is underwritten. Regardless of differing underwriting appetites, insurers take into account various factors when pricing a risk.
This decision is typically determined based on information provided in the client’s proposal forms and supplementary questionnaires, depending on the risk. For example, construction-related risks will typically require an additional questionnaire on projects relating to basements, swimming pools and cladding/fire safety exposures.
The level of information required by an insurer will vary depending on the market conditions. In a soft market, insurers may require less information than in a hard market because the underwriters are being more aggressive with their pricing and have a wider appetite to write business.
What information will an underwriter require and why?
Fee income is one of the main rating factors when it comes to costing PI, and underwriters will typically rate a PI risk on the fees for the last financial year. New ventures will be rated on the estimated fees for the forthcoming year.
Underwriters will apply a base rate to each service provided. For example, with a multi-disciplined firm of architects involved in feasibility studies, project co-ordination and various other activities, the underwriter will apply a rate to each type of work carried out, then they will apply various discounts or loads depending on the other underwriting factors (to be discussed below) to come to their quoted premium.
Insurers will also rate the risk on an average fee income figure over a set number of years if they feel this is the most appropriate course of action. This could be to offset a large spike in the client’s fees in the event that they are paid a large amount at once (e.g. payment for a large contract).
Underwriters will look at the contracts the client is involved with to determine whether or not to write the risk. In addition to the total contract value, the services provided, fees earned, and the start and completion dates are also relevant for underwriters to understand their exposures.
It should be noted that some insurers have a maximum contract value allowance within their underwriting authority levels. This means that, regardless of the nature of the contract, if the total contract value exceeds their underwriting authority, they will not be able to provide terms.
Supplementary questionnaires were mentioned earlier in this article and due to the amount of information requested in a typical proposal form, insurers tend to request additional questionnaires to extract the information on what they deem as higher risk activities. The definition of “high risk” will vary from insurer to insurer but most would include work relating to basements, swimming pools and cladding/fire safety as higher risk.
An insurer’s claims experience across any given profession will also influence their view on what is high risk. For example, one insurer might have been inundated with claims from architects providing advice on the fire safety aspects of buildings, whereas another insurer with a similar-sized book of business with architects might well be operating at a much lower loss ratio, and could take a different view when underwriting this business.
Underwriters will have varying views on a claims experience, but one of the key questions to those that have experienced claims will be around the steps taken to prevent similar incidents from occurring. Information on risk management procedures put in place or additional staff training will be useful in these circumstances. It is also worth pointing out that having a handful of previous notifications in your claims experience does not make your risk unattractive to underwriters. Actually, quite the opposite is true, as this demonstrates positive risk management and that you are aware of the notification procedures in your PI policy.
Training of staff is another area that underwriters will be keen to learn about given that this can help to reduce the chance of claims. Supervision of staff, especially more junior staff, is also important as it demonstrates the insured’s attitude to risk. If claims are arising from employees who have inadequate training or working on projects beyond their skill levels, the insured would be wise to put procedures in place for staff training and/or supervision to rectify this. Keeping Continuous Personnel Development (CPD) logs for each member of staff is always advisable.
Do you carry out work overseas and is the work subject to UK law? Underwriters will factor in overseas work and the territories involved as certain parts of the world are more litigious than others and can incur excessive defence costs. Most PI policies will exclude claims brought in the US/Canadian courts as standard. This cover can be obtained but usually at an additional premium and on an aggregate costs inclusive basis.
If you have any offices overseas, it is worth looking at whether local laws dictate the need to have locally admitted cover placed to meet local requirements. Certain territories will not allow cover to be placed from the UK. Insurers with global reach can issue local policies to sit under the master policy placed in the UK, and again this is taken into account when the underwriter calculates their terms.
Risk management procedures
It always helps to include risk management information as part of the PI submission. Copies of the standard terms and conditions and the risk register are useful for example. If the insured utilises sub-consultants, they should provide information on how these sub-consultants are vetted and how their levels of PI cover demonstrate positive risk management. Back to back agreements are always advisable due to the subrogation process if a claim is notified from the work the sub-consultant undertakes for the insured. If this happens, the insured’s PI policy would operate first and foremost as the work was undertaken in their name. The insured’s PI policy would pay the claim (subject to the policy terms and conditions) and the insurers would then look to subrogate the loss against the sub-consultants PI policy. If the sub-consultant carries a lower PI limit than the insured, there is a danger that the claim could erode the sub-consultants PI limit, leaving the remainder sitting on the insured’s claims experience. This could impact their future premiums.
If the insured has gone through any acquisitions or mergers or has any planned in the near future, insurers will be keen to understand how this might impact the business. An acquisition might well bring additional services that change the underwriter’s view of the risk. This can have an impact on the underwriter’s appetite for the risk going forward.
Other points to consider
In general, it is worth putting in the time to pull together as detailed a submission as possible, as this demonstrates to insurers how seriously you treat your PI renewal. This can often be the difference between obtaining terms and receiving declinatures in the current market conditions.
The above list of underwriting factors is not exhaustive but should provide a good overview of why PI underwriters ask for the information they need to provide terms.