How underwriters calculate premiums
Professional indemnity, public liability and other policies can vary wildly in cost. Even the same business can be quoted a range of prices from different insurers, and in some rare cases the same insurer can quote two different prices for the same business! Let's dig into how they make their decisions, with a focus on professional indemnity as prices can vary wildly for this type of cover in particular.
Tables of Contents
- How does insurance work?
- What is a fair premium?
- What does an underwriter do?
- What is a Professional Indemnity rate and how do underwriters calculate it?
- What is the difference between a hazard and a risk
- What are physical and moral hazards?
- How can I make sure I get the best premium?
How does insurance work?
Most insurance works by policyholders paying into a pool which will pay individual members for any losses they have so long as the policy covers them. Insurance companies hold these pools and charge people more or less depending on how likely it appears they are to suffer a loss or claim. The more likely that loss is thought to be, the higher the premium that person or business will pay.
What does an underwriter do?
An underwriter is responsible for setting prices (premiums) for insurance policies. That may be on a policy by policy scale, or it could be by setting the prices for tens if not hundreds of thousands of motor or other online policies. Underwriters review businesses and produce policies with suitable cover additions and exclusions, at a price which means that on average claims can be paid out, insurance company running costs can be paid, and some profit is hopefully made for the insurance company.
Both of the below examples show underwriters working at extremes in the insurance industry, although it’s likely that any experience you have with a professional indemnity underwriter will sit somewhere in the middle. It’s common for a policy to be priced and produced by a computer and then for a single underwriter to step in and ‘tweak’ the final documentation to suit you, referring to one or two colleagues along the way:
Example:
- An insurance company specialises in car insurance policies, for which there is a vast amount of national and international claims data available. Using this historic record, underwriters can set extremely accurate premiums for thousands of clients at the touch of a button. If you bring a higher risk to the pool of policyholders it’s likely your quoted premium has automatically accounted for this without ever landing on a person’s desk.
- If you are at the cutting edge of a unique field, or if you operate in a sector currently experiencing a 'Hard Market,' premiums will likely be high. In 2025/2026, underwriters have applied stricter terms across entire industries—most notably in construction, architecture, and surveying—following the ongoing impact of the Building Safety Act. In these sectors, market capacity has reduced, leading insurers to shift from 'any one claim' limits to more restrictive 'aggregate limits' (where the total coverage cap applies to the sum of all claims in a year, rather than each individual claim).
What is a fair premium?
A fair premium is one which strikes a balance between cheapest quote and most comprehensive cover. It’s not necessarily the rock bottom price, as this can sometimes be a sign that an insurer has misunderstood your activities. A fair premium comes from insurers who understand your business and the risk you face, and have priced accordingly to cover those risks. It’s always a good idea to call up your top three quoting companies and ask each what their policy can offer you before deciding.
What is Professional Indemnity rate and how do underwriters calculate it?
The rate is the multiplier that is applied to your turnover to determine your premium. For example a rate of 1% would mean that if your turnover was £100k you would pay £1,000 annual insurance premium (1% of your income). Rates are set by insurance companies in order to ensure that claims are paid, operating costs are met and some profit is generated.
Rates are calculated by looking at historical claims for groups of professionals, and determining what premium each member of the group should pay to be able to pay for those claims if they should happen in future at a similar cost and frequency. Often there is also an insurer’s companywide ‘minimum premium’ that no policy can dip under, as below this the insurer would lose money every year on that policy.
In practice, an underwriter would typically do the following:
- Determine your business category to identify the ‘base rate.’ E.g. all management consultants have a ‘base rate’ of 1.25% (this figure can vary hugely by insurer).
- Compare your business activities to the ‘average’ business in your line of work and identify any especially low or high risk elements of your work (e.g. high-stakes financial advice or large-scale structural engineer projects would be deemed 'high risk'). It’s likely you will be asked how much of your turnover these activities generate.
- Apply lower or higher rates to these activities depending on the risk associated with them.
- Apply any specific exclusions, limits or clauses to your policy based on industry, experience, claims history and any other risk factors identified (all of which can feed back into rate).
- Review the final premium against the company ‘minimum premium’ and seek the opinion of colleagues or senior underwriters on their proposed final premium.
- Generate a quotation and return to you with the final quoted amount, including Insurance Premium Tax (IPT) at the standard rate of 12%. It is important to note that while PI insurance almost always attracts this 12% rate, some specialized add-ons like travel insurance are subject to a higher 20% rate. Unlike VAT, businesses cannot reclaim IPT, so this tax represents a final cost to your bottom line.
- Remain open to discussion, debate and additional proposals to reduce both your and the insurance company’s risk.
What are physical and moral hazards?
When determining pricing and risk, there are two categories of hazards underwriters will consider.
A physical hazard is something real which contributes to the chance of a loss, such as the industry you work in, the turnover of your business or the business’ claims history.
A moral hazard is more the attitude of the director, the company culture or the public perception of the company. It’s much harder to make pricing decisions based on moral hazards, but any perceived moral hazard can still sway other pricing decisions for better or worse.
How can I make sure I get the best premium?
Whilst there are a few ways to help get a competitive premium, the best way is to be up front with any underwriter you speak to. Remember that no matter your own opinions of the insurance industry, those that work for it generally believe it to be a force for good. Don’t be afraid to ask for more information or clarification (or even a policy comparison with a competing insurer’s quote), and be ready to move on or give challenge if it seems that the person you are speaking to doesn’t understand the policy they are offering you.
Professional indemnity has many nuances and spans a vast range of businesses, so it might take some time to get the right ‘fit’ between you and an insurance company, but once you do you will have bought peace of mind and an experienced ally in defending negligence claims. For detailed budgeting, refer to our updated Professional Indemnity Insurance (2026) guide. While low-risk freelancers can now find entry-level cover for less than £100 per year, premiums for high-risk professions like architects have risen to an average of £1,374+ due to increased regulatory scrutiny and material cost inflation.
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