Insurance + Risk Services

Why are my PI Insurance premiums so high when I don’t consider myself a ‘high risk’ business?

A large number of engineering businesses across many different disciplines are currently grappling with sky rocketing Professional Indemnity (PI) Insurance premiums.

Below we provide an update on the current state of the PI Insurance market, explain why premiums are increasing, the disciplines most affected, and steps you can take to help minimise premium increases, and make them more manageable.

The current state of the PI insurance market

  • PI Insurance is currently experiencing significant premium increases.
  • Dependent on the nature and scope of activities performed, premium increases for engineers starting at 20% are now a common occurrence.
  • Restrictive PI Insurance policy conditions and coverage exclusions are being applied to many engineering occupations that are classed as ‘high risk’ by insurers.
  • PI Insurance is becoming harder to place (source coverage) across the insurance 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 both in Australia and into Lloyds of London. We are witnessing insurers either:
    • withdraw from the PI Insurance market, or
    • reduce their capacity to provide cover due to the impact of poor loss ratios (high cost of claim payouts / high frequency of claims) on profit performance.

To summarise: In general, Australian insurance markets are hardening. We are witnessing rate increases across the majority of PI Insurance policies, even those that fall into lower risk occupation categories.

Why are PI Insurance rates increasing?

Over a sustained period, PI Insurance companies have experienced high loss ratios. This has subsequently placed upward pressure on insurance premiums, 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 when an insurer’s claims pay-outs make up a high proportion of the total funds in the insurer’s premium pool. This can present a problem, because having an overall loss ratio that is too high, can 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 for the insurer, and puts substantial pressure on an insurer’s bottom line, forcing them to take measure to bring their premium pools back into balance.

In response to high loss ratios, insurers may take the following measures:

  1. Increase PI Insurance premiums in an attempt to remediate loss ratios,
  2. Acquire more capital from their re-insurer to top up the funds, and / or,
  3. Place restrictions on the types of risks that can be underwritten. E.g. decline insurance cover on high risk occupations more likely to suffer a sizable loss i.e. fire engineers that are at risk of being held partially liable for damage to buildings with non-compliant cladding, or highly flammable building materials.

As evident in the PI Insurance market trends canvassed above, this scenario is currently occurring in Australian insurance markets, where international reinsurance companies that fund insurers, are dictating higher rates back to Australian insurers. This ensures re-insurers can keep premium pools in balance and continue to pay claims. The very unfortunate result of this is that Australian insurers have their hands tied, and are forced to pass on higher PI Insurance premiums, and cover restrictions to the end client.

Engineering disciplines considered high risk by insurance companies:

Engineering disciplines currently most affected by the hardening PI Insurance market in Australia are:

  • Geotechnical engineers
  • Structural engineers
  • Fire engineers
  • SCADA/ Process Control engineers
  • Defence engineers
  • Engineers performing rail related works
  • Aerospace engineers

Steps to help PI Insurance premiums become more manageable:

1. Is the cover right for you?

Speak to a professional PI Insurance broker who can perform a thorough risk analysis, provide specialist advice on the level of PI coverage suitable for you and tailor a PI policy accordingly.

Tailored PI cover structured for your specific circumstances (e.g. contracts, activities, location, experience etc.) can help ensure your PI coverage works where it needs to, and eliminates unnecessary spending on excessive cover limits, redundant cover inclusions, and inappropriate excess levels.

2. Time is of the essence

The more notice you provide before the PI Insurance cover is required, the better! We cannot emphasise this enough.

It can take time to access local and international PI Insurance markets to source the best possible options for your risk exposures, negotiate policy conditions and structure the PI Insurance program.

To achieve the best possible outcome for coverage and premium, contact EngInsure AT LEAST ONE MONTH before your renewal or the date coverage is required. This is particularly important for PI policies with higher limits.

3. Increasing excesses to lower the policy premium

In some cases, increasing your PI Insurance policy excesses can help to reduce insurance premiums. Be sure to discuss this option with your EngInsure Insurance Advisor, who can explore this and negotiate on your behalf.

4. Detail is absolutely everything

As a specialist PI 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.

Providing detailed information is critical for two reasons:

  • To enable insurers to accurately rate and underwrite your PI risk,
  • To enable EngInsure to negotiate and achieve the best possible PI Insurance policy premiums and cover conditions.

Information gaps in a PI proposal form will always see insurers assume the worst – loading premiums, and / or imposing restrictive policy conditions.

5. Robust risk management measures – tell insurers about the good stuff!

Does your business have a robust Risk Management Plan in place? A Risk Management Plan with clear measures to protect your business from the likelihood of a PI Insurance claim occurring, and that limits the size of a PI claim can be viewed favourably by insurers when assessing your risk.

If you have a Risk Management Plan in place, make sure you share all of this information with the insurer! By demonstrating a clear strategy to limit PI Insurance claims, and minimise the chances an insurer will need to pay a claim, it may help to reduce your insurance premium.

Examples of risk management measures to lower PI risk may include:

  • Well written contracts, limiting liability
  • Managing staff qualifications and enforcing high training standards
  • Fastidious digital record keeping and centralised data management

6. Your website

Before the rise of the internet, PI Insurers previously looked at business brochures, capability statements and other marketing materials to understand more about the company they were insuring. These days however, insurers use your website to discover more about your engineering firm, and the services offered.

This can be an advantage or disadvantage depending on the look, feel and accuracy of your website. Consider whether the services and company information detailed on your website are a true and accurate reflection of the work currently undertaken. Over-inflated or inaccurate information can do you a disservice when insurers are applying premiums and policy conditions.

7. Premium Funding

Premium Funding is a flexible financial solution that enables businesses to spread the cost of insurance premiums over equal monthly instalments of up to 10 months.

Removing the financial burden of a lump sum insurance payment can help you maintain quality PI Insurance coverage, while freeing up cash flow. This enables you to utilise finances which would otherwise have been spent on insurance, to proceed with investments essential to business growth.

Points to note on Premium Funding:

  • Tax deductible – generally businesses can claim a deduction on interest expenses. Speak to your accountant for advice on what applies to your individual circumstances.
  • Low cost – generally a low-cost financing option with competitive fixed interest rates
  • Simple application process – far simpler than applying for a bank loan and requires fewer background checks and credit reports.
  • No guarantor – premium funding doesn’t require personal guarantees, or charges over business or assets

Should you wish to take up Pemium Funding, please speak to your EngInsure Insurance Advisor.

Weighing up price v’s quality

Remember the age old saying…”poor man pays twice”? When comparing the price of PI Insurance cover options, try not to compromise on quality unless you absolutely have to. If one PI policy is substantially cheaper than all the others, it is probably for a reason. Tread carefully, otherwise it may come back to bite you in an insurance claim.

As PI Insurance specialists, we understand and really sympathise with how difficult it can be to obtain cover for a ‘reasonable’ premium at present. EngInsure advisors can assist with advice and recommendations to help you weigh up all the available cover options to achieve the best possible outcome for your business.

EngInsure are here to support you with important PI Insurance advice and solutions to reach the best possible outcome for your business. For assistance, please get in touch with one of our specialists:

T: 1300 854 251

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.