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DON'T BLOW YOUR COVER

INSURANCE - Professional indemnity insurance premiums fell last year but they are set to creep up again. Matthew Reed and Warren Jones explain how to minimise increases.

Last year many professionals noticed something that a few years ago they would have thought unbelievable. The slide in professional indemnity (PI) rates in the UK that started in 2004 continued its downward move with rates reaching their lowest level for four years. For many architects and surveyors premiums dropped by as much as 40%.

The trend was the same even in the heavier end of the construction market, with higher risk professions including geotechnical and environmental engineering also seeing a reduction, albeit less so.

So what happened- The simple fact of the matter was an over-abundance of capacity: too many insurers chasing the same type of business.

While much of this over-supply focused on the easier end of the market, a number of new insurers entered the market last year with a specifi c interest in harder to write risks. And the good news for geotechnical and environmental engineers is that those insurers are likely to stick around.

Continuity is an extremely important factor in PI insurance, but is often overlooked by many firms and brokers who shop around every year just to save a few pounds.

The simple reason is that PI is underwritten on a 'claims made' basis, which means a firm has to make a claim under its current policy even if the event in dispute took place several years earlier. The insurer is reliant upon full disclosure of information by the policyholder to write and price a policy correctly. If a new insurer is faced with a claim and believes the policyholder did not disclose enough information at the time of taking out the policy, it could throw the claim out and the firm could find itself high and dry.

On the other hand, if a firm chooses to continue with its insurer for several years, then that insurer will be better positioned to support the claim.

This is going to play a significant role for those renewing their PI policies in 2006.

There has been much speculation in the insurance market on the effect on rates across the board following Hurricane Katrina.

Property rates in North America have gone through the roof. And, as the core of the insurance market is driven by property rates and liability is on the fringe of the market, insurers could well switch capacity away from the fringe to the core.

If they do switch, a shrinkage in capacity in the liability sector is likely to result in higher rates.

Rates will not however shoot up overnight, as in 2002. Increases will be more gradual and sensible.

Insurers have become a lot better at writing construction risk and fi rms a lot better at managing their risk. The process of adjudication has reduced the amount of litigation, with parties getting round a table and resolving disputes a lot more quickly - leading to claims costing less and insurers having a lot more underwriting certainty.

So, faced with an inevitable if low increase in premium, what can be done to get a good deal?

Engineers should make sure their house is in order. Sound risk management is always the best line of defence and will always be respected by insurers.

Engineers should get to grips with their current policy. They should ask their broker to go through it in detail so they understand the extent of cover protecting their balance sheet, and identify any areas that need to be improved.

Do not shop around straight away.

Organise a meeting with the current insurer and go through the business with a fine toothcomb, to make the insurer feel more comfortable and offer a sensible premium.

While 2006 is going to be the year when rates start a gradual move up, it is not a reason for firms to panic.

By acting calmly and getting professional advice and support from brokers and insurers, fi rms will not have to pass the begging bowl around to pay for PI cover.

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