Cost of professional indemnity insurance

Umesh Puri, associate director of the professional indemnity division of Howden Insurance Brokers, says there are several factors insurers will take into account when determining the premium, excess levels and breadth of cover they are prepared to offer.

The amount of gross commission and fee income is one of the clearest ways of assessing how much business a firm transacts and therefore best reflects the exposure to insurers, he says.

Insurers will review a firm’s financial performance in the last few years as well as the estimated income for the current or next financial year and will query any unusual spikes, or drops in turnover, Mr Puri notes.

He says: “A steadily growing firm or a firm with a fairly consistent level of turnover is usual but a sharp drop or increase may be a sign of an underlying issue within a firm.

“Of course a blip in turnover is not always an issue so if your income does show unusual activity you should provide a brief narrative to explain why.”

Mr Puri also says insurers will look at the way business is split.

Some activities that a firm conducts are deemed to be higher risk than others and are therefore rated accordingly by insurers.

If two firms have a similar turnover but one focuses on higher risk investments (for example, tax mitigating products and unregulated collective investment schemes) and the other on lower risk investments (for example, Isas and unit trusts) Mr Puri says it is likely that the former firm will have to pay a higher premium.

Alternatively he says insurers may impose a higher excess to those products deemed higher risk or exclude them from cover altogether.

Mr Puri says that is not to say higher risk products should be avoided as in fact financial advisers have to consider them to be independent or that recommending these products will make a firm uninsurable.

Firms conducting these activities do however need to be able to demonstrate how they advise their clients in these areas, says Mr Puri.

He says what due diligence and risk management they undertake and the procedures they adhere to will need to be demonstrated to the insurer.

Another factor that dictates premiums is complaints and claims history.

Claims are sometimes inevitable, Mr Puri notes, especially in the current climate. Insurers will want to know the nature of any claims or circumstances surrounding complaints and how they came about.

Any measures taken to prevent a recurrence of the situation, changes to procedures that may have been implemented, such as internal reviews and introducing sign-offs, are all steps that will be well received by insurers, Mr Puri says.

Insurers may also require sight of the standard documentation that a firm uses, Mr Puri notes, such as engagement letters, terms of business, fact finds and reports.

He says these documents can help show how well defined your services and audit processes are and whether they can be relied upon to help defend a claim.

The insurer will also consider the internal compliance functions within a firm, he adds.

Mr Puri says: “Your position may be further strengthened if you have an external compliance provider who conducts regular reviews on your business.”

An insurer is also likely to take account of the quality of the firm’s personnel as evidenced by their experience and qualifications and the firm’s commitment to good practice in terms of training and recruitment.

If a firm is part of a quality group or network, then Mr Puri says this will also be viewed positively as it normally indicates a higher set of standards.

Once the insurer has settled on a rate, after taking into consideration the rest of the underwriting factors, Mr Puri says they will apply this to the total income.

He says this normally means that the larger the income, the larger the premium, although size discounts are usually available.