Average Cost of Professional Indemnity Insurance

Professional indemnity insurance can be one of the largest business insurance costs that a business can incur. Professionals across the board can be quite surprised at the difficulty in finding cheap PI insurance quotes, so here's some information on professional indemnity costs to help you spot a good deal when you find one.

Average Cost of Professional Indemnity Insurance

NimbleFins analysis shows the cost of UK professional indemnity insurance ranges from £45 to thousands of pounds a year, depending on profession and other factors. These prices reflect rates for a small business; the larger the business (that is, the more employees and the higher the turnover and contract sizes) and the riskier the work, the higher the rates.

As you can see in the chart below, profession has a huge impact on PI rates, with some professions costing 25X as much as other professions to insure, or more. For instance, the problem of fire-prone claddings could mean an architecture, construction or surveying firm needs to pay a small fortune to get insured in the current market—potentially tens of thousands of pounds a year in some cases. Or they may not even be able to get a comprehensive policy covering cladding.

What determines the cost of professional indemnity insurance?

Professional indemnity insurance is priced based on the specific risks of your business. Your business structure can even make a difference—for example, liability insurance for a limited company can cost more than if you're self employed. Let's see what factors affect the price of PI insurance.

Professional indemnity quotes vary widely from business to business, because insurance companies price according to the perceived risk presented by each individual business. All else equal, businesses that are 'riskier' will pay higher premiums than businesses viewed as lower risk. Professions like architects can pay a lot more than, because a mistake can have significant financial repercussions. For example, an architect's mistake could mean that a building has to be partially demolished and then rebuilt at great expense.

Here are some of the factors taken into account by underwriters when determining your professional indemnity costs:

Level of cover. Higher limits of insurance are typically subject to a higher insurance rate. So the more cover you need, the higher your premium. That said, additional coverage tends to get cheaper. For example, the first £100,000 of cover is usually cheaper than the next £100,000 of protection, and so on.

Size of your business. Insurers want to know your annual turnover, as well as the size of your largest contracts. This information is critical to determining your PI premium because turnover and contract size indicates how much risk the insurer is taking on.

Line of work. Some industries are more prone to expensive professional errors than others. For example, architects are known for paying higher PI rates because a mistake on a large building project can cost thousands or millions of pounds to put right.

Location. Where you operate can also play a part in your premiums, although to a lesser degree than with car insurance quotes, or home insurance. The legal basis of your contracts is particularly important, as if you are sued in another jurisdiction the insurer will have to pay for experts in, say, U.S. law to defend you. This will cost much more.

Business structure. Even your business structure can affect your business insurance premiums. We've noticed that sole traders tend to pay the least, while limited liability companies with more than one director tend to pay the most.

Claims history. Businesses that have made a claim in the past few years are more likely to pay a higher rate than a business with no claims in their history.

Number of employees. Businesses with more employees typically pay more for PI insurance; the reasoning there is that more people can be harder to manage, making mistakes more likely in a larger business.

In addition, neatness and transparency count for a lot in completing forms. Make sure to fill them out as comprehensively as possible. Don't be afraid to call the insurer to ask for more information as they will count this in your favour. Remember that this insurance is to protect you for making errors, so making errors on the form you send to the insurance company is a bad look. Being open and honest will also get you points—hiding business activities will only bite you later on at claims stage.

Calculating risk

There are many many factors impacting risk and perceived risk, which then contribute to premium. These bits of information about your business are then fed into in-house pricing models that translate this risk into a quote.

There are two possibilities for turning risk calculations into a quote. Either your policy is totally automatically underwritten and priced up online, in which case your premium is relatively set and you may get some leeway in either direction if you call in, OR your quote will be escalated to an underwriter who will conduct a full review with you and then 'manually' produce you a policy with a bespoke price and individually selected terms and conditions.

In the second case this can mean either much cheaper or much more expensive than your initial online quote, but with a good underwriter your final policy will actually be the right one for you.

Top Tip. Insurance underwriters perform their own internal risk calculations, so you may receive very different quotes from different insurance companies for comparable cover (e.g., similar limits of insurance). This is why comparing quotes from multiple providers is so important.

What to do if quotes are really expensive for your line of work

If you're in an industry like architecture, construction or surveying that is proving problematic for getting affordable PII quotes, there is something you can do about it. If an insurer refuses to cover something it's always worth asking: 'Can they cover it for a sub-limit of the main policy limit?' But if you do get cover with a lower sub-limit for certain activities, be sure that your clients are aware of this.

You can also ask if clients will not hold you responsible for certain aspects. Where possible, hire a legal advisor to discuss the best way you and your client can mitigate liabilities outside of a PI policy, in cases where some crucial aspect of your services can't be covered.

If this is the case it's still worth obtaining a PI policy but you may be able to push the insurer to reduce their premiums given that a key element of the cover is reduced or missing, so don't be afraid to ask.

Higher PII costs for riskier businesses

If your business activities are deemed 'riskier' (e.g., your management consultancy business is involved in accountancy or tax advice, investments or financial services, M&A, insolvencies, liquidations, receiverships or turnaround management) then you'll not only pay a higher premium, but you may have a harder time finding cover as fewer insurers will be willing to take on the risk.

For example, we ran some test cases with a major UK business insurer and found they'd provide quotes online for an accountant that performs audit work, general accountancy, payroll and personal tax consultancy—but they wouldn't offer an online quote for an accountant performing secretarial work or share registrations. This is just one example, but it shows that underwriters may be less keen to cover 'riskier' work, at any premium.

Why is my professional indemnity insurance so expensive?

Professional indemnity insurance covers compensation for a client's financial loss due to negligence, which can be a significant amount of money in some situations—as a result, PI premiums can be quite expensive to reflect the potentially large payouts by insurers.

In addition, quotes can have as much to do with an insurer's internal risk management than with an individual business seeking cover. For example, an insurer could decide they have too much exposure to a particular industry so their risk appetite for writing new policies would be quite low. As a result, the insurer's quotes for new policies in this industry would likely be high relative to the rest of the market. (This is why it's so important to compare quotes before buying a policy.)

Comparing cheap vs. expensive PII quotes

Regardless of the reason, insurance quotes can vary significantly from one insurance provider to the next. For example, when we priced PI cover for a software developer and management consultant we found that quotes from Hiscox (a higher-end brand) were 4X to 5X more than the cheapest professional indemnity cover in the market.

It's worth comparing the substance of those quotes, however, and even asking the more expensive insurer why they are more expensive. It may be that the cheaper quote is missing some critical element, or it may be that the more expensive insurer has given you a generic price and is willing to go lower on their quote.

Considering all of this, it is always worth comparing how different insurers will price Professional Indemnity cover for your business—whether you are renewing or buying your first policy for a new small business.

Methodology

We gathered quotes using an online quote system for a sole trader needing £2,000,000 of professional indemnity cover. The average figures displayed above reflect the average of the three cheapest quotes we could find. Data was gathered for a few different professions to see how PI insurance rates vary by occupation. Quotes can vary significantly by line of work, business size, location and many other factors, so your PI insurance rates might vary significantly from the figures shown here.