A competitive insurance market means that now is a good time to get a new professional indemnity policy. But underwriters will want to see evidence of risk management procedures.
If you want to buy professional indemnity (PI) insurance, the UK is currently one of the best places in which to do it, with many insurers willing to offer policies, creating a competitive insurance market. As such, prices for premiums have stayed fairly steady – or have even dropped – in the last few years.
With the onset of the recession, only a handful of insurers walked away from the consultants’ PI sector. Others have entered the market, as Marsh senior vice president John Doe explains: “The insurance market hasn’t shrunk – it’s actually grown. In the last year or so there’s probably £50M more capacity than there was in the year prior to that, so the market has continued to soften and rates have been dropping.” However, it seems that to be only a matter of time before that situation changes and premiums start to go up.
“The insurers have been talking about it,” says Marsh managing director Tim Payne. “Everyone was talking about January, and what could happen after that, because most reinsurance is renewed on the 1 January each year. But it hasn’t happened yet. “It’s very difficult to predict the insurance market at the moment,” he continues. “If you’re in a soft market, you know what’s happening – prices and rates are coming down. If you’re in a hard market you know that they’re going up. At the moment, it’s being threatened. A lot of the markets are talking about increasing rates, and some are doing it, but there are enough insurers out there to keep the competition. Whether that will last another three months or six months, I don’t know.”
Doe and Payne recommend that engineers take advantage of the current competitiveness in the market to see what different insurers can offer – especially as a recession can lead to firms taking on more risk.
“We believe competition is important, because PI is the third highest individual cost for a firm, so it’s worth testing the market. But the other thing is, if you’re thinking about buying increased limits of insurance, now’s the time to buy them, because the price is still good at the moment,” says Payne.
One thing to watch out for if the insurance market starts getting tougher, is the “retro date” of the policy. “When you get into a hardening market, they start to put a retro date on the date of inception of the policy. So you buy a higher layer [increased cover], but it only covers you for work done from the inception date.
“At the moment we are still seeing new limits bought without a retro date,” say Payne.
In addition to testing the market, Doe and Payne advise their clients to talk to their insurance advisors about how best to develop a more sophisticated insurance placement strategy.
“We hear that underwriters are starting to drill down into people’s activities,” says Doe. “And if the market does get worse, they will be doing that even more, to identify risks they like and risks they don’t like so that they can differentiate the pricing between different engineering organisations.”
What they will be looking for, he says, is evidence that risk is being minimised and managed. The ideal engineering client would have a good spread of geography, project sector, repeat business with responsible clients, a good claims record, and “lots of risk management”. Doe was surprised to see that 30% of the firms responding to the NCE/Marsh Risk Survey had no written risk management procedures, and in many cases there seems to be a lack of dedicated resource towards risk.
“As one would expect, there’s a significant area which relates to being paid and the funding of projects. You’re not going to get away from that, because it’s part of the economic situation now. But there are also areas that could be improved by better risk management, and companies need to put more effort into risk management.”
He adds: “That third of them without procedures may well be the third that are going to undercut their competitors and sign up to contract terms and create competition for the people that are really trying to control their risk. So the industry is going to create some problems for itself going forward.”
There is a view in the insurance market that firms cannot say they are too small to manage their risk, because they are still getting involved in projects. If something goes wrong, there’s significant ability for it to destroy the well-being of your company.
“The risk can be a bit different, in that the bigger engineers are probably getting involved in the bigger, more involved projects,” Doe adds. “But the risk is probably going to increase for mid-size engineers, because they’re going to be squeezed. And to compensate for being squeezed, they’re probably going to have to look at undertaking projects at a lower cost, maybe quicker, maybe on less advantageous contracts. “So there’s every reason to still manage your risk.”
This risk management should involve identifying possible risks in every aspect of what the firm does, including who you’re working with. “I think insurers will be anticipating people taking much greater care over who they’re dealing with, and greater financial checks on their clients and subcontractors to try to make sure that risk’s under control,” says Doe.