PII – distinguishing risk and severity

Recently I have written and posted a number of articles which have questioned why it is that so many professionals fail to buy adequate levels of Professional Indemnity Insurance (PII) cover. This has provoked some interesting feedback and debate. One particular thread related to the perception of risk.

It was suggested to that professions such as Insurance brokers and accountants only buy the minimum level of PII cover put forward by their institutes and professional bodies because they perceive themselves to be at low risk of having a claim made against them. This is a dangerous argument as it confuses the "risk" element of insurance with the potential or "severity".

If we were to apply the same argument to a more tangible product, such as home insurance, we can see that if you base your insurance program on this presumption it is bound to fail. Here the risk or chances of having to make a claim for fire damage are low; however a home owner would be ill advised to insure his property for less than the rebuild value based on the fact that it was very unlikely to burn down. Instead the correct advice is to insure for full value of the property. The "risk" element to the common pool fund is reflected in the premium charged for what is a relatively low frequency of high severity claims.

This same principle applies to Professional indemnity Insurance. There is a risk to all professionals, however good, that a claim will be made against them. This is the guiding principle which justifies the rules laid down by Institutes and professional bodies that their members must buy professional indemnity insurance.

The levels set by such bodies however can only every be guidelines as to the minimum level of PII cover required. The individual or firm must assess the potential for loss based on the work that they do and the worst case financial exposure for their business.

Applying this argument to an insurance broker buying PII cover it can be seen that the FSA minimum of €1,120,200 for a single claim and €1,680,300 in the aggregate (or 10% of annual income up to £30 million), is only the correct level of cover for a very small broker whose customers purchases are limited to policies where the risks are basic and the sums insured are low.

The moment that you throw in an insurance policy that covers a factory or a property with a sum insured over the FSA PI minimum limit you are exposed to the possibility of a claim and need to increase your cover limit accordingly. The "however slight" argument is taken care of by the relatively low premiums charged for PI cover for General Insurance brokers vis a vis the risk.

For more help and advice with Professional Insurance cover please see our web site www.piexpert.co.uk or call PI Expert on 01825 745410.