With claims against surveyors showing no signs of abating, Ana Paula Nacif examines the move by professional indemnity insurers to tighten their underwriting criteria.
With the property market showing no signs of recovery, a continuing flow of claims against surveyors has led professional indemnity insurers to tighten up their underwriting criteria. While some insurance companies have put premiums up for this sector or are sending clients off empty-handed on their renewal dates, others have even left the market entirely.
"We are told that there is resistance from some insurers to writing new business for firms with survey and valuation work," confirms Steve Abrahams, professional indemnity underwriting manager at RSA. "And some insurers are not taking on new business or are placing a cap on the percentage of the surveyor's activities arising from valuation work."
At the end of last year, broker Marsh warned that surveyors faced rate increases of up to 100% for their PI insurance, following a four-fold increase in claims notifications between 2008 and 2009. However, David Stocks, senior vice president, financial and professional practice at Marsh, explains that this trend only affects surveyors involved in valuation work. "Many of those involved in valuation work have seen a significant uplift in PI costs because of the increase in claims activity in this area, as well as insurer concerns that there is latency in claims activity that may arise following an economic downturn."
Property market fears
During the last property market recession, in the 1990s, insurers experienced a high volume of valuation claims. So now, according to Ian Bowler, professions leader for surveyors in QBE's PI team, "the PI market is, quite rightly, fearful of what may lie ahead, as lending institutions set their sights on the surveying profession to bolster balance sheets".
As a result, he points out that some insurers are taking a 'blanket' approach to the class, either declining business or imposing large rate increases. However, according to Mr Bowler there is a strong argument that this time round there will be large contribution awards made against the lenders, with potential discounts of up to 90%.
"There is also a perception that many lenders will not want to go to trial and face embarrassing issues of contributory negligence and mitigation. The public perception of banks is poor at the moment and they will not want to be criticised at trial."
QBE, the second largest Royal Institution of Chartered Surveyors-listed insurer by income, has seen claims notifications against surveyors go up by 67% from 2008 to 2009. But Mr Bowler is keen to emphasise that the insurer is in for the long haul. "Our approach is a long-term one and clients will benefit from stability of underwriting approach and rating."
Paul Redfern, partner at law firm Beale and Company, believes that insurers should get prepared for even more claims, especially from the buy-to-let and commercial sectors. "There has always been a delay in relation to commercial valuations, which usually come in around 18 months to two years after the economic situation starts to get better. The drop in value in commercial property has been far greater than in the residential sector, which means that the potential losses for lenders are enormous and have not been crystallised yet."
Also, according to Gail Cook, professional and financial lines manager at Zurich, compared to the last recession, there has been a slower move by lenders to repossess properties. "This may have the effect of extending the period over which we see these valuation claims being made under the PI policies."
Protecting against the cold
Amid the uncertainty around potential losses, insurers admit that they are taking steps to protect themselves by reviewing their underwriting criteria and being more diligent in terms of understanding their clients and the risks they present. "As the largest RICS insurer," Mr Abrahams explains, "we needed to manage our exposure carefully and have, therefore, been constantly reviewing and amending our underwriting strategy for the past few years."
Anne Hudson, business development manager at Markel, adds: "Proposal forms are just a snapshot of the surveyor's business, so we now ask questions about the type of contracts they had in the past to build up a clear picture of what could happen in the future."
According to Ms Hudson, one of the areas of high exposures for insurers involves substantial venture capital. "These are typically in city centre developments and may include 'off plan' valuations. Surveyors are faced with fewer comparables to substantiate their valuations and greater fluctuation in market values."
Surveyors involved in sub-contract work and networks are also seen as high risk. "Networks are driven by timescales and volume," Ms Hudson says. "A surveyor may previously have done all the surveys himself without a problem, then take on a big opportunity stretching resources in terms of volume or geography. Each extra step in the chain makes the survey more remote from the client with the surveyor having less control. Surveyors need to demonstrate how they consistently deliver quality to their client, otherwise insurers may offer them punitive terms or even refuse to insure."
In this tough insurance market, surveyors have to work harder to ensure their risk management processes and procedures are up to scratch. "We are advising our insureds on the importance of obtaining their clients' written instructions from the outset," Mr Stocks points out. "So, in the event of any disputes, firms are more able to formulate robust defences. Firms also need to make clear in the terms of engagement that responsibility for their valuation report only extends to the parties to whom it is addressed and that it cannot be relied upon by any unauthorised party."
Some blame the current PI crisis on greedy lenders with lax lending criteria. "The challenges in the PI market are indeed a direct result of the sub-prime lending sector seeking to recoup catastrophic losses brought about by a combination of a boom in non-status or self-certification lending, the credit crunch and the impact that this had on property prices," explains Duncan Greenwood, professional risks partner at Beachcroft.
Surveying the damage
Unaffordable insurance and an unfavourable economic climate have proved to be too much for some surveyors. According to Mark Southwell, risk and compliance manager at RICS, lack of insurance cover forced many surveyor firms out of business.
He also argues that "a lot of allegations don't have much substance in terms of negligence of the valuer. Lenders are looking to recover losses arising out of the lending practice related to self-certification and the lack of diligence in the lending process".
Even if allegations are unfounded, costly investigations are likely to have a negative impact on both insurers and their clients. "Many of these notifications will not lead to payments but the surveyor's claims record could be blighted as far as potential new markets are concerned," explains Mr Abrahams.
Surveyors are, therefore, looking for alternatives, but there doesn't seem to be an easy option. "The market shows no change," says Mr Greenwood, "save for it becoming arguably a harder one for valuation surveyors to find cover which does not make their businesses unviable."
In this challenging PI market, the RICS Assigned Risks Pool has had more applicants, says Mr Greenwood, but he adds that the "premiums within the pool can be equally prohibitive".
The ARP is for firms unable to obtain cover in the open market, the risk being shared by the listed insurers. "The ARP is in existence for this type of scenario and as we understand it, 13 firms entered the ARP in the 2009/2010 year, more than in the previous five years combined," says Mr Abrahams.
"This is an extremely small number when compared against the total number of RICS registered firms and considerably less exposure for insurers than the equivalent ARP for solicitors."
Self insurance is another option, although not for everyone. "Self insurance is a possibility, but the vast majority of firms lack the financial resources to implement the necessary 'captive', not least due to extremely difficult trading conditions over the last couple of years and their experience of premium hikes," explains Mr Stocks.
For those who can afford it, Mr Abrahams explains that self insurance in the form of increased deductibles can demonstrate commitment from the firm to their own risk and confidence in low potential for claims, as well as lowering premiums. However, he emphasises: "RICS rules stipulate minimum requirements for PI insurance so most firms will still be placing cover in the insurance market. If cover is limited or significant deductibles are taken, then dispensation has to be obtained from the RICS."
So far, the rules are still in place but Mr Southwell admits, if the situation gets worse, RICS may have to rethink its regulatory position regarding insurance requirements for surveyors. "We have a minimum insurance requirement for our members but with the difficulties some surveyors are facing this has become a regulatory issue for us. We are between a rock and hard place in terms of whether we should reduce our requirements with a view to reinstate the current position as and when the market is buoyant and sensible."
Nationwide Building Society has predicted that the housing market will suffer a double dip this year, which does not bode well for surveyors. And, according to Justin Bowen, professional indemnity underwriting manager at Hiscox UK, capacity will probably remain short while the property market is below peak value and there are no signs of capacity increasing for the business yet.
He adds that there is a longer-term issue for surveyors. "Unless they are able to charge an appropriate fee to cover the cost of the risk, they will have to pay a large proportion of the fee they earn in insurance costs. At times when risk is heightened, insurers may consider that even that is not enough."
However, Lance Rigby, executive director at Howden, believes that the story could be different. "There are new insurers coming in to the market and the new capacity will change things," he explains. "These new insurers won't have the claims history of the last five years and they will be more competitive. The market will be more competitive from the middle to the end of this year."
Vive la difference
In the meantime, Mr Rigby emphasises that clients need to differentiate themselves when making their case to insurers. "Insurers are asking more sophisticated and important questions, which were not asked three years ago. They are looking at geographical spread — someone who works closer to the property is a better risk than someone who lives 60 miles away, for example. This means that clients need to make sure they provide as much information as possible to their insurers and brokers. They also need to start the renewal process much earlier and ask brokers for an opportunity to meet the insurer to present their case."
Despite the doom and gloom, insurers argue that it shouldn't be too much of a problem for surveyors with good record and impeccable risk management procedures to find PI insurance.
"We have had the same people managing PI for 20 years," says Ms Hudson. "Our criteria continues to check the client has good risk management in place and explicit procedures and controls as well as a way of auditing their valuation. Surveyors who have these systems in place will find it as easy as before to get insurance."
This may well be good news for surveyors involved in valuation work but the situation may get worse before it gets better. "As the market sees more claims come through from over-valuations and fraud, premium and underwriting action could well get tougher," concludes Mr Abraham. "This adverse situation for surveyors is likely to remain the case while there is so much uncertainty around the economy in general — and specifically the property market."
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