The disruption caused by COVID-19 exacerbated ongoing concerns for insurers when considering the long-term outlook for the property market and the wider economy.
Insurers' previous experiences following the global financial crisis in 2008 and resultant raft of negligence claims relating to alleged over-valuations against valuers continue to be the focus for most underwriters when asked to insure valuation work for secured lending purposes.
Over the last decade, there has been an evident improvement in the profession's approach to risk management. There is far greater awareness of the need for valuers to evidence their valuation with proper comparables and ensure it is supported by sound rationale.
Alongside prudent record keeping and increasingly centralised processes, this means the profession's ability to defend such claims in the future should be welcome news to insurers.
The role of the panel manager – namely those that have added another layer of auditing and oversight to its panel firm's valuations – should also be acknowledged as being beneficial to all stakeholders, not just insurers.
Considering these changes, as well as the reforms made to the claims litigation funding landscape in 2013 and the introduction of the Mortgage Market Review in 2014, it might be reasonable to expect the claims environment to look very different if there were any significant fall in property prices. However, until this can be shown, insurers will continue to look closely at the valuation profession.
As the UK went into its first lockdown in March 2020, the market for professional indemnity insurance (PII) had been in an upswing cycle, with premiums increasing and the amount of indemnity an insurer could deploy decreasing.
The hardening of the PII market has been as challenging as at any period in the past 30 years, which has implicated most professional services, not just the surveying and valuation profession.
In 2018, we saw the Lloyd's performance review, which aimed to reduce volatility across its syndicates' books and to focus on sustainable profit rather than simply growth. As a result, insurers have looked more closely at the risk profiles of firms they take on, and have required far more information from insured firms when approaching the renewal of their PII.
In most cases, we have initiated renewal processes for our clients earlier than was traditionally necessary, to ensure firms have enough time to prepare before their policy expires.
This is particularly important as turnaround times across the market became much slower during the lockdown period, partly due to new remote working methods, but also because of the influx of new enquiries that active insurers dealt with, when others drew back.
We also saw the independence and discretion previously available to individual underwriters being withdrawn, and the more challenging and complex accounts having to go through additional referral and peer review processes.
Meanwhile, changes to indemnity limits have brought excess layers into sharper focus. Aggregate limits of indemnity are now permitted under the RICS minimum terms and conditions; strictly subject to the indemnity limit being on a 'round-the-clock reinstatement' basis, meaning that each layer of indemnity steps down as its underlying layer is exhausted.
As a result, the first excess layer of a policy could, at some point become the primary layer. This had a major impact on excess layer pricing and is where some of the larger premium increases have occurred.
These changes will likely remain in place for the foreseeable future; but, reassuringly, new capacity entered the market for surveyors at the beginning of this year and this will be key to stabilising premium rates, and potentially leading us towards 'softer' PII market conditions.
From April 2022, we saw two new insurers added to the listed panel of insurers and Berkshire Hathaway, Accredited and Allied World Assurance Company returning to the list. This was a welcome change to an otherwise limited pool of insurers, as we have not seen any new entrants into the surveyors' PII market at a primary layer level for some time.
We have seen premium improvements; however, they are unlikely to return to pre-2019 levels. One reason for this is that insurers regard the recent increases as being a long-overdue market correction. Nevertheless, the new entrants should encourage more competition and help ease any ongoing premium rate increases that insurers may require.
RICS has produced this guidance note to assist both members and their clients in understanding the main risks and liabilities associated with surveying. It guides members in the negotiation of equitable contracts with clients and the avoidance of major risks and pitfalls.
PII is a key part of managing risk and, in arranging PII, regulated firms should ensure that the amount of cover purchased is consistent with the nature of their practice, proportionate to the risks taken by the firm and consistent with the RICS PII requirements.
Valuation remains a key risk for insurers because of the potential for a repeat of more allegations of overvaluation claims. It is therefore important that firms address insurers' concerns, highlighting how they have worked to protect their own positions – and those of their insurers – in the event of an increased claims environment.
Some insurers are more sensitive to particular issues than others. Where necessary, firms should therefore speak with their broker and try to understand the specific concerns of any potential PII insurers being approached for the purpose of renewal; they can then prioritise the time and resources to address these.
Fire safety-related exposures also continue to be a focus for insurers. The current RICS minimum terms for PII require insurers to provide some cover for claims arising from work on buildings of four or fewer storeys. However, for some firms insurers may not be prepared to give this cover and in those circumstances, dispensation must be sought from RICS.
Several PII providers have emphasised their support for the Building Safety Act 2022 provisions for safeguarding residents in high-rise buildings. As these take effect, we expect insurers to require firms to ensure they demonstrate a clear understanding of their obligations considering any changes introduced under the act.
The act imposes new roles and extended responsibilities on professionals in certain areas of work, and firms may need to be able to show insurers that they have the appropriate level of competence and understanding to undertake these.
For firms approaching their renewal, it is always beneficial to know the issues on their insurers' radar. These can change over time, varying with recent claims activity, concerns about emerging risks, regulatory changes, or the general economic situation and its potential impact on the profession.
Firms are therefore advised to engage with their brokers early to try and glean the specific information that may be required to reach the desired outcome.
Professor Sara Wilkinson FRICS, Dr Gillian Armstrong and Professor Jua Cilliers 11 November 2022