How Your Professional Liability Premium is Determined
To those outside of the insurance industry it may appear that professional liability premiums are determined somewhat randomly by people with limited knowledge of the design profession. As a former underwriter turned broker, I am here to tell you that this misconception couldn’t be further from the truth. Your professional liability premiums are established through a process involving the assessment of several factors over which you have some power to influence. Looking through the eyes of an underwriter, design professionals can gain an edge in obtaining the best possible insurance premiums with the use of a thoughtful application submission. The article below describes the factors underwriters use in developing quotes for professional liability insurance.
What your application tells underwriters
When an underwriter receives your application their immediate task is to evaluate your firm’s potential loss exposure. The two basic types of loss exposure are frequency and severity. Underwriters use the information on your application to calculate the probability of your firm experiencing claims over the life of the policy and furthermore, if you have a claim, how much it will potentially cost.
However, before even considering the merits of an individual firm, insurance carriers already have defined what type of firm is a “good risk” for their company based on previous experience. They try to attract as many such firms as they can with various coverage differences and program enhancements but the primary lure is price. Their objective is to set a price that attracts good risks but still allows for an underwriting profit. This is complicated by the catastrophic nature of professional liability claims in the A/E industry. Losses tend to be quite large with a recent statistic stating that the average indemnity payment for a paid loss is upwards of $350,000. As a result, https://TheBestOfPanamaCityBeach.com https://orlo-osaka.com/ https://www.spanisch-claro.ch/ https://www.hyresmaskiner.com/ the many end up paying for the few. Design firms need to make their business look attractive to the insurance company in order to obtain the best possible terms. The first step in this strategy is to identify the different risk factors and then present your firm in the most positive way. While numerous factors determine the risk that your firm poses to an insurance company, for the purpose of this discussion we will focus on the most critical areas.
Area of Practice
There is not much that you can do to influence an underwriter in this category. You are what you are. But it may be helpful to understand how the insurance company evaluates each discipline when it comes to their exposure to risk. The most common discipline in most insurance companies’ books of business is Architects. As a result, insurance carriers tend to use their rates for architects as base from which to determine rates for other types of firms.
There are two disciplines that tend to pay a higher rate for their insurance than Architects: Structural Engineers and Geotechnical Engineers. Keeping in mind that underwriters are always thinking about exposure to loss, the question they asks themselves is ” what happens if there is an error in a structural calculation or a geotechnical report?” In many cases the project is stopped or even scrapped with a worst case scenario being a collapse. Because of this, Geotechnical Engineers take the unenviable position of paying the highest average rate in the industry with some carriers charging as much as two times what Architects will pay. Structural Engineers pay a much higher rate as well but they tend to be roughly 1.5 times more than Architects.
The professional discipline seen as having the lowest exposure to loss and thus paying the lowest rate is Electrical Engineers. Going back to the basic underwriting question, if an Electrical Engineer makes an error, the damage and corresponding fix is usually far less than a foundation issue or an insufficient support beam. There are always exceptions but the claims statistics strongly support this evaluation. Positioned somewhere between Electrical Engineers and Architects sits Mechanical Engineers, Surveyors, and Civil Engineers with Civil Engineers having a rate that most closely resembles that of Architects.
Location of Projects
The location of your practice or more specifically, the location of your projects, does have bearing on the rate that is determined for your firm. Claims statistics show that the probability of a loss on a building in Miami, Florida is much different than a building in Flagstaff, Arizona. There are many theories as to why this is the case, but the statistics clearly show that a higher rate is needed in most major metropolitan areas as opposed to most rural areas. Again, there are exceptions to every rule, but the statistics on this topic are definitive.