If you find that you need professional indemnity insurance but you’ve never had this type of insurance before, it’s natural to wonder how much it’s going to cost you. And in fact, it’s also natural to be a bit apprehensive because most people think that insurance is expensive – or at least, they do until they find they need to make a claim, when they suddenly realise that it can actually be really good value for money.
Like all types of insurance, how much a professional insurance policy costs (called the “premium”) is a combination of two factors. The first is the cost of the insurance claims and the second is the insurer’s admin costs. Some insurers are more streamlined than others, so they can offer cheaper premiums for the same cover because they have lower costs, but it’s the first one – the cost of the insurance claims – that’s the main driver of premium levels.
The cost of claims
Nobody knows how much the total claims cost will be over a period of insurance. If they did, there would be no need for insurance. However, insurers have large amounts of data so they can calculate what the anticipated claims cost will be by estimating the chance of a claim occurring and the likely size of any claims that do occur. The process of performing this calculation is called underwriting.
The chance of a claim occurring
Clearly, one of the main things that will affect the chance of there being a claim is the type of work that you’re undertaking. If you’re in a high-risk profession, your professional indemnity insurance premium will be higher than if you are in a lower-risk profession. The size of your business also has an impact. If you’re giving twice the amount of advice, there is twice the chance of a claim.
However, it’s not quite that straightforward and other factors can affect the chance of a claim occurring. Your business procedures can have an impact, for instance. If you get someone to check all of your work, you’re more likely to spot a mistake before it results in something bad happening than you are if you don’t have your work checked. Insurers will look at your business procedures as well as your previous claims history to determine how likely you are to have to make a claim compared to other businesses in the same trade sector as you.
The chance of a claim is also connected to the policy cover. If you’re happy to have a more restricted policy, you can save money on your insurance premiums, but that can be short-sighted as it can leave you uninsured if you find yourself in a situation where you need to make a claim. If you select wider cover, though, your premiums will be higher because there’s more chance of the insurer having to pay a claim.
The size of any potential claims
Again, if you are in a high-risk profession, the chance of any claim being an expensive claim to settle is higher. If you’re an interior designer working on private dwellings, a mistake in one of your designs would be a problem, but wouldn’t be as catastrophic as a mistake in one of the designs of an architect designing motorway bridges.
You can save money by selecting a lower policy indemnity limit. The indemnity limit is the maximum amount that an insurer will pay in the event of a claim. As with restricting your cover, though, it’s important to make sure that you select an appropriate indemnity limit relative to your business so you aren’t uninsured if a large claim is made against you.
You can also save money by opting for a higher policy excess so that, in the event of a claim, the insurer will pay out less because you’ll be contributing more towards it.