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PII exclusions and costs still hitting practices

Adrian Malleson

Where are we now with professional indemnity insurance? RIBA Business Benchmarking shows practices continue to be constrained, says Adrian Malleson

Asbestos is one of the many PII exclusions architects have become accustomed to.
Asbestos is one of the many PII exclusions architects have become accustomed to. Credit: iStock

Zooming in to the detail of the business of architecture, the RIBA Business Benchmarking report takes a detailed snapshot of architects’ practice each year. And it is detailed. The survey covers practice revenue and where it comes from, practice expenditure by item line, salaries, work sectors, business practice, and the value and area of overseas work. Completing it each year is a commitment practices make upon becoming chartered. It’s an invaluable, longitudinal dataset of and for the profession.

Practices can use the data to see how their businesses are doing when compared to others that are similar, and the level of detail means business opportunities are there to be uncovered. Also, the data gives a robust overview, so shows the real, measured value chartered practices add to the UK economy. It is an indispensable tool for lobbying. Further, because of the granularity of data, it lays a solid evidence base to support the RIBA’s response to emerging issues. Later, this article will look in detail at one example of that, professional indemnity insurance.

First, though, an overview of the findings of the 2022 report. After 2021’s Covid-related falls in revenue, workload and staffing, this year’s figures show practice and profession stability. There is recovery from the pandemic, but not resurgence.

Revenue has stabilised (up 1% ), and so have profits, which have held steady. Staff numbers have recovered from the pandemic, furlough and lock-down (and that was worryingly uncertain for many months – let’s count some blessings). But we still despondently await the touted ‘roaring twenties’. Revenue remains below pre-pandemic levels, international work has fallen back slightly, and the strong year-on-year growth of 2015 to 2020 has stalled.

Over the last few months, headwinds have blown harder: planning delays, unpredictable project cost inflation, labour and materials shortages, an unprecedented surge in energy costs, and a rapidly climbing inflation spike. It looks like challenges to the profession are here to stay awhile. With the Bank of England forecasting a long recession (from which the construction sector won’t be exempt), the next year or two are unlikely to be plain sailing. Not all practices will feel the pressure, but for many winning new commissions will be harder, and margins will be challenged.

Professional indemnity insurance

Practices face a range of challenges, which are together putting pressure on practices. One of those challenges, Professional Indemnity Insurance, has become increasingly expensive over the last few years, and the number and extent of policy exclusions has risen. With the help of the data Benchmarking provides, supplemented by a one-off member survey in summer 2022, we have the detail. Let’s take a look.

In 2022 (or more precisely, the 12 months to May 2022) the average PII premium across all practices of all sizes, was £32,926. To give that average figure a bit of context, the average cost of PII, as a percentage of practice revenue, has risen from 1.3% in 2019 to 2.5% in 2022, and for practices with more than 50 staff, that figure is now 3.2%.

Taken together, the approximate total value to insurers of chartered practice PII premiums is £115 million. It’s not small potatoes.

Some more top-level figures. The median PII cover provided through PII is £2 million. Across practices, policy excesses remain broadly stable, with a median figure of £1000, although this is significantly higher for medium (£10,000) and large (£50,000) practices.

Looking back at Benchmarking data to 2018, PII costs have increased significantly. Then the average premium was £16,876. The rise to £32,926 in 2022 equates to a 95% increase within five years. That said, the rate of increase has slowed. 2020 to 2021 saw the average value of policies increase by 55%, but in 2022 it was a far more modest 3%.

Of course, the cost (and level) of PII varies greatly depending on the type of work undertaken and the number of professionals within a practice. Graph 1 illustrates this. For a single person practice the cost of PII averages £761 (and in the context of average revenue of £52,529 that’s not insignificant). For a large practice of 100 or more staff, the average PII bill is heading towards half a million, at £422,959.

However, it’s not just the cost of PII cover that is challenging, but the exclusions applied, too. The number and type of exclusion is rising. For many practices this is as detrimental as the cost increases. Policy exclusions are a double hit. Reducing the range of work a practice can undertake curtails the business of architecture; at the same time, the professionals most able to reduce risk in risky projects are excluded.

Practices report multiple exclusions on policies, with 49% citing ‘cladding/insulation combustibility in general’, and 44% for both ‘fire safety (general)’ and ‘basements’. Around a third report accepting exclusions for ‘asbestos’, ‘swimming pools’, ‘cladding of buildings 18m plus in height’ and ‘cyber-attack’ (this last one being a less remote possibility than might be thought). For many, these exclusions are being added for the first time at the point of renewal, with, for example, 40% of those accepting fire safety as an exclusion doing so for the first time. For cladding, that figure is just over a quarter (28%). Feedback from some suggests insurance brokers may have insufficient domain expertise to draft the policies the profession needs; some are poorly drafted and so needlessly ambiguous or restrictive.

What is the RIBA doing?

PII is at the centre of the Institute’s activities. The RIBA 2022-2023 Biennial Action Plan, Educating and Supporting Architects, Promoting Architecture and Celebrating Excellence, describes 10 priorities, including PII. The strategic aim is to secure sustainable premium levels and comprehensive cover for architects’ services, to meet the needs of both the profession and insurance market.

To support this, the RIBA has launched a Council-led expert advisory group  to help. The group’s work will benefit members and the profession, and help ensure public interest is met. From within the construction sector, the group is taking a lead on PII on behalf of the RIBA, in part by working closely with insurance industry experts.

Work is in progress, but armed with the results above, (giving a detailed, robust picture of the current market, covering levels of premiums, excess and policy exclusions), the RIBA will be able to create and put forward a strongly evidence-based case on behalf of the membership. The data is informing our discussions with the insurance market, which is taking a proactive stance and providing valuable insights.

The Institute is focused on attainable short and medium-term improvements that will help ensure longer-term resilience and protection for architects and their clients, which is particularly important as we again face challenging times.

Recommendations emerging from this work are expected in early 2023, and implementation will follow later in the year. 

Adrian Malleson is head of research and economic analysis at the RIBA. Thanks to chartered practices for completing their benchmarking returns


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