With professional indemnity (PI) insurance premiums predicted to rise by as much as 50% in the next two years, what can brokers do to mitigate the effects?
It is widely acknowledged that PI premiums could be set for a huge upward hike and mortgage brokers look likely to be the hardest hit due to the unregulated nature of the sector and the relative ease with which a brokerage can be established.
At the same time, the FSA is actively recruiting more staff into its small firms division and has pledged to be more intrusive, after repeated accusations of past regulatory failure. This has already manifested itself through a three-fold increase in fines against adviser firms compared to this time last year.
Problems with products such as sub-prime mortgages have led to insurers being much smarter when it comes to scrutinising claims. As a consequence, some advisers may be unable to afford or even find the right level of protection at all.
Many brokers may be left exposed as a result of having to compromise or cut back on cover.
But forewarned is forearmed and there is a range of practical things you can do to try and keep premiums to a minimum.
Sadly, simply shopping for the lowest quote is not one of them. Beware the attractions of the cheapest premium - it could well turn out to be the most expensive route.
So don't be tempted to prioritise premiums ahead of cover. Instead, try focusing on:
Cost saving initiatives
Review your policy limits to check they are appropriate and ascertain if there is any scope for cost savings by reducing them.
Check your retention levels, as insurers may offer discounts for increased excess levels for specified work types. It is also worth enquiring as to whether your insurer offers differentiated levels of coverage.
Pay attention to detail and make sure you are getting the most out of your renewal. It is also worth thinking about what can you do to generate competition.
With insurance, as with most things, you get what you pay for. As a result, it is important to weigh premiums against the total cost of risk. Any short-term savings must be set against the potential for increased claims costs falling directly on your firm.
Managing the renewal
Insurers will target and compete for firms who can demonstrate they are well-run and, as such, constitute a lower risk than the rest of their peer group. They often form this view from a relatively brief review of the submission, so it is important to create the right impression.
Present information accurately and concisely. Type as opposed to completing by hand and check to ensure all totals are correct and consistent. Where additional details are requested, such as past claims, declinatures, regulatory visits and so on, a covering letter helps create the right impression.
Claims data should be thoroughly checked to ensure it clearly identifies payments, reserves and any applicable excess and take time to highlight important trends such as volatility, aggregation and the root causes. Large matters (anything paid or reserved over 50% of the premium) should have additional notes explaining the measures taken to prevent a reoccurrence.
Your risk management procedures should also be explained, including details of external audit or compliance assistance, internal file checking, quality audit procedures and complaints handling. Advisers who enjoy the backing of a support services provider have the luxury of being able to count on expert assistance here.
Additionally, try these other common sense tips when buying or renewing a PI policy:
• Avoid being caught out by exclusions at the back of a policy by ensuring key activities are not written out of the coverage.
• Be vigilant for terms and conditions that could compromise cover in the event they are not strictly complied with, or that allow the insurer to avoid responsibility.
• Check for increased excesses for certain product types and activities, mindful that increased claim excess provision means an increased capital adequacy requirement.
• How efficient is the claims handling and support provided by the insurer? This can make a big difference in the event of a complicated or contentious claim.
• PI claims generally take longer to resolve than in other classes of insurance and it is not uncommon for some to take five to seven years to be settled. Make sure your insurer has the commitment and financial stability to remain in the sector for the long term.
• Be prepared for a notable tightening in aggregate language. Policy construction - not exclusions - is set to become the order of the day.
• Advisers who hold higher qualifications may get more favourable professional indemnity insurance terms.
• Maintain a proper paper trail so it can be shown what advice was given to clients. Being able to demonstrate good risk management to insurers is fundamental to securing a competitive rate.
Finally, increasing policy excesses or accepting specific exclusions in return for lower premiums means that more provision will need to be set aside in your accounts in case a claim occurs. In other words, you are effectively increasing your level of self-insurance.
Putting premiums ahead of cover constitutes a huge risk. If cover looks too cheap it probably is and for all the wrong reasons.
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