Professional Indemnity (PI) Insurance has been a point of pain for a vast number of engineers over the last 12 -18 months, and continues to be so across the Australian market.
A significant rise in the quantity and severity of PI insurance claims, combined with the ‘cladding crisis’, and increased litigation have seen PI Insurance premiums rise substantially. As a result, cover is often provided subject to restrictive policy conditions, cover exclusions and high excesses.
For some engineers, particularly those in the construction sector, PI cover has become cost prohibitive to the point where some businesses cannot afford the necessary PI Insurance, affecting their ability to continue business operations.
To help you navigate these challenging PI Insurance market conditions, this article provides key information on why the hard insurance market is occurring, and what you can do to achieve the best possible outcome for your engineering business.
State of the PI market
- PI Insurance is currently experiencing significant premium increases. Dependent on the nature and scope of activities performed, premium increases commencing at 20% are now common.
- Restrictive PI policy conditions and coverage exclusions are being applied to many engineering occupations classed as ‘high risk’ by insurers.
- PI Insurance is becoming harder to place across the market, with insurers declining to provide insurance quotes for occupations and business activities deemed as high risk.
- The size of the PI insurance market is diminishing. We have seen the withdrawal of Insurer’s and capacity from the market due to the impact of poor loss ratios on profit performance.
- Continuity of developments & projects are being threatened, particularly in the construction sector where PI cover is becoming unaffordable or unobtainable. PI insurance is mandatory for some professions and often a requirement under the terms of contract. The inability to access PI can halt works completely.
- Various state regulators have intervened in some professions, allowing businesses to continue operating with certain cover exclusions.
A specialist PI Insurance broker can be instrumental in working to minimise price increases, while also negotiating the best possible policy terms and conditions for your PI Insurance.
PI Insurance market conditions & rate increases
Before we explain how to combat these insurance market conditions, it is important to provide some background on why insurance rates are increasing, and policy conditions are becoming more restrictive.
In general, Australian insurance markets are hardening. We are witnessing rate increases across the majority of PI Insurance policies, despite many falling into lower risk occupation categories.
Why are rates increasing?
Over a sustained period, PI insurance companies have experienced high loss ratios, putting upward pressure on insurance premiums, and invoking tighter policy conditions e.g. higher excesses, cover exclusions, and restrictions on the insurers’ risk appetite (i.e. risks they are able to cover).
What is a ‘high loss ratio’?
A high loss ratio occurs where an insurer’s claims payouts are a high proportion of the total funds in the insurer’s premium pool. This can present a problem, because a loss ratio that is too high, can subsequently put an insurance company into poor financial health.
If the insurer exhausts their premium pool with too many claims payments and not enough incoming premium to grow the total premium pool, they would be unable to pay insurance claims.
As an example, a confidential PwC report found that PI insurers for building certifiers and surveyors wrote $40m in premiums in one year, but one insurer alone faced cladding-based claims worth $50m. Evidently, this is not profitable, and puts substantial pressure on an insurer’s bottom line.
In response to high loss ratios, insurers may take the following measures:
- Increase premium rates to bring loss ratios back into balance,
- Acquire more capital from their re-insurer to top up the funds, and / or,
- Place restrictions on the types of risks that can be underwritten. E.g. decline insurance on high risk occupations more likely to suffer a sizable loss i.e. fire engineers that could be held partially liable for damages in buildings with non-compliant cladding, or highly flammable building materials.
This scenario is currently occurring in Australian insurance markets, where international reinsurance companies that fund our insurers, are dictating higher rates back to Australian insurers. This ensures re-insurers can continue to keep premium pools in balance and continue to pay claims. The result however, is that Australian insurers have their hands tied, and are forced to pass on higher PI Insurance premiums, and greater cover restrictions to the end client.
In the current climate, engineers carrying out ‘high risk’ business activities e.g. fire engineers, building certifiers etc., or engineers with a poor claims history, can have high premiums and excesses imposed, or even be declined cover. As an engineering PI insurance specialist, this can significantly limit the number of insurance companies we are able to approach to place PI cover, making it increasingly difficult to obtain insurance for certain engineering occupations and/or business activities.
How can a specialist PI insurance broker assist?
a) Competitive Premiums
As a specialist PI insurance broker, EngInsure approach a number of different PI Insurance markets (insurers) when sourcing quotes.
A number of these markets can only be accessed through insurance brokers, therefore using a specialist broker such as EngInsure, can help ensure greater competition when it comes to the insurance premiums available. Our experience in this space means we can easily align your engineering risks with suitable and specialist insurance markets that can deliver the best result for you.
Note: Pending an engineer’s business activities, the specific risk appetite of some insurers may restrict their ability to provide underwriting terms. In some cases this will reduce the number of insurance quotes available to you.
b) Negotiating better policy conditions
Information is everything!
As an insurance broker, it is our job to represent you. We are continually negotiating with PI Insurance companies to reduce premiums where possible, and remove blanket or unfair excesses where they don’t apply.
To enable us to negotiate and achieve better PI Insurance policy conditions, detailed information is critical. Information gaps in a PI proposal form will see insurers assume the worst – loading premiums, and / or imposing restrictive policy conditions.
c) Risk Management
A sound Risk Management Plan can help illustrate to insurance companies that aside from insurance, a company has other protective measures in place designed to reduce the likelihood and impact of adverse events, helping minimise the probability of making a PI Insurance claim.
To ensure your engineering firm can achieve the best possible outcome when it comes to PI premiums and policy conditions, a specialist PI Insurance broker can be of great value.
A professional PI Insurance specialist will:
- Provide advice on the type of information and reports required by the insurer, to achieve the best possible premium rates from the outset.
- Know the best insurers to approach based on your specific engineering business activities and corresponding PI risk exposures.
- Have access to PI Insurance markets not available to the general public (i.e. ‘broker only’ insurers and policy wordings).
- Negotiate the best possible insurance policy conditions when it comes to imposed excesses and exclusions.
- Negotiate the best premium for your firm’s specific risk exposures.
- Provide personal advice and recommendations for your engineering firm on insurance placement, and any other issues that may arise throughout the policy period.
- Manage any insurance claims on behalf of your engineering business, representing your case to the insurer, always seeking the largest settlement, or best outcome possible.
To engage EngInsure’s advice on Professional Indemnity Insurance placement in what is an increasingly challenging market, please contact the EngInsure Insurance & Risk Services team on 1300 854 251 or click here to fill in our online contact form.
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.