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Are my professional indemnity premiums too high?

  • 07/04/2003
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After 10 years' experience in the market, in 2001 I set up my own advisory business. I specialise in mortgages, although I also offer mortgage related insurances. I have never had any complaints, but this year my professional indemnity (PI) insurance premium has increased four-fold, and now has an excess that was more than three times my last premium. Why has this gone up so much, and will statutory regulation cause this to get much worse?

The increase in rates is not restricted purely to this type of cover, but it appears this is an area where dramatic changes are in evidence. From speaking to insurance providers and brokers there is a belief that rates in the PI market have increased for a number of reasons.

The move in society towards a ‘blame culture’ has resulted in a significant increase in PI claims and therefore the erosion of any claim funds.

Essentially, premium increases have not moved in line with claims volumes and have therefore created negative claims funds. Due to the poor performance of this sector, there are less underwriters prepared to take on PI risk and therefore the capacity has dropped dramatically.

A lack of re-insurance capacity is also a factor.

Insurers say that while they cannot guarantee that increased regulation will not increase PI costs, they do not believe it will. The brokers Abbey National Business talks to have faced similar experiences of increased rates. It appears that rates last year were quoted at double the value of the previous year. Insurers said that this was the result of general trends, no doubt as detailed above. Brokers also suggest that while increased regulation has had an effect, more relevant is the claims culture that we now see. They reported that shopping around in some cases means reasonable rates can be obtained and perhaps this is the only option currently available that can reduce costs.

In summary, the overwhelming reasons are increased claim volumes combined with increased claims settlements as court awards increase. The current increased costs are compounded by the fear that costs will continue to escalate, therefore causing some underwriters to withdraw and the rest to give large increases.

The only thing that seems clear with the approaching Financial Services Authority regulation is that the mortgage advisory business will become increasingly expensive.

CP174 has indicated the current thinking on the subject of PI cover. On one hand it seems to indicate the fact that mortgage broking is recognised as a lower risk than insurance-related business, but on the other hand it is also confirming why the cost of PI will continue to rise dramatically.

With a regulated structure there will be more focus on standards of compliance, record keeping, best practice and controls, so all these will fall under the cover provided. As there are so few current providers of PI cover the costs will continue to rise towards the charging level of current regulated advice, representing around 3.5% of turnover (brokers are currently closer to 1.5%).

However, the major price increases seem to be driven more by the simple lack of providers in the market. The insurers may focus more on the bigger operations including networks and other organisations providing group/block cover, leaving the small sole trader isolated, either unable to get cover or being pushed out of the market through huge premium increases.

It will be down to individual firms to demonstrate they have a strong and structured compliance system as we move towards full regulation, and the insurers will be costing their premiums accordingly.

But the regulators must ensure fairness in ensuring this part of the industry continues to be able to afford to offer independent and quality advice to the people often forgotten among all this ‘ the customers.

Statutory regulation has little to do with increases in PI insurance premiums or excesses. While regulation may stipulate a higher level or upper limit of indemnity cover it is this, not regulation per se , that causes the additional cost and influences the premium.

PI underwriters have struggled to keep prices down over the past few years as the Mortgage Code Compliance Board has made compensation awards in a number of claims of various sizes. For example, in one case alone, compensation of £66,000 was awarded. This coupled with the pension reviews and compensation for mis-selling has led many Lloyds firms to re-evaluate premiums, even for mortgage-only business.

On reason this premium could have increased four-fold is because it is attached to an IFA’s PI policy. This will be far more expensive than a specialist insurer’s mortgage only business.

The key issue is therefore who is the policy coming from? Underwriters are suffering huge losses and use premiums to offset them. If you consider that for every £100 premium an insurance firm can make as little as £10 ‘ it takes a lot if premium profit to account for £66,000 compensation.

This does not mean the whole PI insurance market has seen increased prices. There is evidence that a few specialist underwriters, who understand the mortgage PI market, have held their premiums for this year, reflecting their knowledge of the market and their willingness to defend a professional mortgage adviser’s position in a claim situation, therefore minimising claim levels and resultant premiums.

My advice would be to look around for a specialist PI underwriter, isolate the mortgage only cover from any other policy and shop around.


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