A gathering storm

The slow emergence from recession by the UK is much discussed and there is a variety of different theories on what caused the economic crash and how recovery is likely to pan out. What we are all certain of, however, is that the legacy of the recession will be felt for several years to come.

At the lowest point of the recent downturn, PII claims against surveyors for the alleged over-valuation of property, particularly in the residential sector were commonplace. These often involved acts of fraud. Many in the wider property and construction sector where at a loss to why this alleged fraud was continually occurring in the industry.

The problem was the same as all things tied in with the law, contracts and insurance. The details are often confidential and cannot be made public. News of this widespread fraud was therefore greeted with shock, outrage and a large dose of disbelief. The only evidence was reflected in the PI premiums being charged by insurers as well as some of the more high profile incidents being reported in the press.  

More of these incidents and claims are starting to be seen in the Courts and, as such, reportable within the press. With this, insurers are beginning to get a more comprehensive picture of the risks currently associated with the property sector.

At this stage, many insurers believe that the worst of the crisis has blown over for the residential property market as most claims are already known about. However, that cannot be said for the commercial sector where insurers remain extremely wary.

This is due to the wide-spread belief that until now, lenders have been reluctant to consider and quantify the full extent of their potential commercial property losses. To do so would further damage their reputation and, after all, if the rents or loans are still being paid, the leases are being renewed, then why recognise in your book something that hasn’t happened yet?  If the economy in general and the property sector specifically recovers quickly enough, then perhaps those potential losses will never need to be acknowledged.  

Recent legislative developments, including the introduction of new liquidity requirements under Basel III are however, likely to force banks to quantify their losses. The Basel III legislation is complex but, in essence, requires lenders to hold more liquid assets and thereby provide an incentive to dispose of properties. As commercial property prices begin to rise again, at least in some regions, disposing of certain holdings is becoming a more palatable prospect as losses sustained will be smaller than, say, 12 to 24 months ago. Those banks considering sales are likely to do this soon particularly if they believe the window of opportunity to be open only briefly as government cuts could bring a double-dip recession and with it, a drop in prices.

One final thought which goes directly to the heart of the recession is the chase for contracts and that all-important cash flow.  As those cost-pressured clients asked their surveyor to provide additional ‘side-line’ services beyond the scope initially agreed, it is easy to stray into quasi-legal or accountancy territory. In an attempt to keep the client happy, many surveyors may have strayed outside their core areas of competency thus unwittingly exposing themselves to claims.

The insurer’s perspective
With a weakened economy and a rise in claims, it is perhaps not surprising that there has been a hardening of attitudes of insurance providers towards surveyors. Sensationalist headlines in the UK press highlighting bad news for the economy may have exacerbated the situation further. The insurance market is now a much more diverse and global place with most carriers having some form of global (non-UK) parent. Shock headlines from the UK press may have helped shift their newspapers but may have also greatly contributed to that overseas HQ making quite sweeping and draconian underwriting decisions whereby they are either unwilling to offer policies to UK firms, or will apply highly restrictive underwriting criteria. With no real attempt by any new players to enter the arena, the dearth of insurers means that those willing to offer PII cover to valuation surveyors are simply able to charge far more as there is a distinct lacking of strong competition.

Furthermore, insurers are aware that premiums have been rising steadily over the past few years and they cannot increase indefinitely. With this in mind, many are now opting to impose larger deductibles (self-insured excesses) instead. This can seem an easy solution to a firm unwilling to pay higher premiums but management teams should always bear in mind that only a few large excess bills could potentially put a firm out of business.

The options
Securing PII cover at a competitive price is fast becoming an uphill struggle. For the determined and prepared surveyor though, there are still options. With increasing selectivity from insurers, those companies that appear to be higher risk will be the unlucky ones. To counter this, you need to ensure that your firm stands above the others by being able to demonstrate an excellent risk management strategy. A good track record will usually help secure a better PII quote, but a sound risk management strategy can help firms who have had claims rejected in the past too. If you are in this position, but can show that you have learnt from mistakes and have gone on to adopt measures designed to prevent similar problems from happening again, you stand a better chance of securing reasonable terms.

It goes without saying that more preparation is a must; assuming that the renewals process will be the same as the previous year could be foolhardy. Firms should allocate extra time to their PII application. The usual four to six weeks allocated to apply for cover is no longer enough; the new tighter system will demand an 8-12 week preparation period at least.

This allows you to prepare the best case possible and also gives you the chance to handle any extra complications that may arise during the procedure.

After wages and rent, PII typically accounts for the third largest business expense for surveyors. With it being such a significant outgoing, surveyors cannot afford not to pay attention to it. Solutions are still out there and having proper preparation, advice and strategy is going to be the difference next time you come to making your renewal.