Professional indemnity insurance premiums are forcing valuers out of the market, but options are available, writes Daniel Owen-Parr.
The professional indemnity insurance market has become a source of deep contention for surveyors, resulting in practitioners being squeezed out of the market owing to the lack of commercially viable options. What is the state of the market today, and what can valuers do to strengthen their business case?
In 2018, a performance review of the PII market was conducted by Lloyd’s of London. In short, it concluded that this specific sector was one of the weakest business lines. The syndicate identified that £3.4bn was paid out and portfolios were under-performing.
Up until this point insurers had been keen to have market share. However, following the review, which identified that premiums were 40% lower than 2003 while exposure had increased, large insurers making up approximately one third of the PII market either withdrew or adjusted their requirements.
Among the main business sectors to suffer have been surveying firms, where applications have become more time-intensive projects requiring enormous detail, with the final cost of the premium being difficult to justify in the context of today’s highly competitive fee environment.
So renewing PII is no longer a straightforward process, and surveyors that are unable to renew will only have access to the RICS-assigned risks pool. With just £1m on an aggregate basis, however, it is only seen as a temporary measure while PII is secured and, if this is not possible, at worst, the practice will invariably go out of business or, at best, have to modify their working practices as to how and what they do.
In April, the RICS held a webinar entitled Professional Indemnity Insurance – The challenges of a hard market. Within this, a PII specialist presented some very stark numbers.
In 2019, insurance premiums increased by 20-25%. These figures mean it the first time surveyors have experienced a hard market as a consequence of supply and demand dynamics since 2012.
The number of listed insurers in the market has fallen by as much as a third, from 53 in 2018 to 44 in 2019 and now just 35-38 in 2020, though I suspect some may query the 2020 number.
Verification
To get a sense of the experience and mood from the valuation profession, we recently approached a sample of the leading practices which make up VAS Panel and asked them to complete a short survey. The box shows results based on responses from 54 different businesses.
VAS Panel survey
1. When did you last renew your PII?
52% in the last three months, 26% in the last three-to-six months and 22% in the last six-to-12 months
2. Did you have to provide any extra information compared to previous times?
73% Yes
3. On renewal, have you seen the price of your PII go up?
89% Yes
4. How much did it go up by?
66% have seen an increase of 20% or more
5. Have you had to put extra risk management processes in place following your renewal?
53% Yes
6. Have you had to put up your prices due to your PII costs?
67% Yes
7. Has this made you consider whether or not to continue working within the short-term lending market?
68% Yes
While only a snapshot, the numbers continue to reaffirm the overall picture of the financial implications of reduced PII availability, but the answer to question 7 is the most startling. If we want a fully functioning market, we simply cannot afford to lose quality valuation firms from the property sector – but in today’s climate that now seems a very real possibility.
If nothing else, as we are seeing almost two thirds of valuation companies reconsider the amount and nature of the lending work they do, this should highlight to lenders from all parts of the market that there are very real and serious implications in terms of supply and rising costs in the near term, as competition shrinks.
Take stock
I’ve painted a very bleak picture, but positive steps can be taken to improve chances of securing a lower premium for PII.
In the aforementioned RICS webinar, a spokesperson presented “Practical guidance on how to reduce your risk and liability”. They looked at contractual terms including personal liability exclusion, a proportionate liability clause and a liability cap, and also covered risk management.
Now risk management is key, and is imbedded at the heart of every surveying practice. The fact remains however that this is largely an internal process, and that is why it can be questioned by insurers.
It is at this juncture that independent auditing comes to the fore. A third party will help support a surveying firm to highlight areas of concern, but more importantly allows valuers to maintain standards and set quality benchmarks for all future work.
This in turn acts as independent proof for insurers when going through the application process, but more importantly at a better rate than would have been realised beforehand.
Take control
In today’s current market it seems a tough ask to take control, but the valuations industry is still helping companies do just that. Lenders will move forwards on solid risk advice based on valuers who are delivering a benchmarked service based on quality.
If this is realised then insurers will recognise that a surveying firm’s PII is a genuinely solid proposition, and the strife of PII will begin to be addressed.
Daniel Owen-Parr is a commercial director at VAS Audit
