Connor Campbell
Depending on your business, professional indemnity insurance can be a notable expense. That’s why it is important to understand what contributes to the price of your premium, and why your policy costs what it does.
Read on to find out how the cost of professional indemnity insurance is calculated, why it can be expensive, and whether or not you need it.
» MORE: What is professional indemnity insurance?
How is my professional indemnity cost calculated?
As with most types of business insurance, the cost of your professional indemnity policy will depend on your answers to the questions that form the basis of your insurer’s calculations. These could include the following:
What level of cover does your business need?
This is one of the most important questions you will be asked when looking for a professional indemnity quote, and one you should ask yourself before you start your search.
You don’t want to potentially waste money on overinsuring your business. At the same time, your policy won’t be worth much if it fails to cover your organisation if things go wrong.
The more cover you need, the more your premium will typically cost. However, the jump between insuring yourself for £500,000 and £1 million, for example, doesn’t mean the cost of your premium will necessarily double. This is because the cost of increasing your insurance limit tends to get cheaper the more coverage you add.
One way to try to work out how much cover you need is to consider the absolute worst-case scenario for your specific business. How much would that cost in legal fees and compensation? This will be informed by what your business does, and the size of your clients and contracts. The bigger the potential worst-case scenario, the more coverage you are likely to need.
What is the size of your business?
The bigger your business in terms of turnover, and therefore in theory the more work you are doing, the higher the chance of a claim being made against you. This means you are more of a risk to your insurer, pushing the cost of your premium higher.
The same is true of the value of the contracts you work on. The bigger your average contract, the more your premium will cost because the size of any claim made against you may be larger.
How many employees do you have?
Linked to the size of your business, how many employees you have could also push the cost of your professional indemnity insurance higher.
And that makes sense. The more people you have working for you, the more people there are to make a mistake that might lead to a claim being made against your business.
How ‘professional’ is your business?
Insurers will also be interested in how ‘professional’ your organisation is. This includes everything from how long you’ve been doing what you do, to your qualifications, how your business is structured, and the levels of risk management you carry out.
What does your business do?
While the specifics of your individual organisation will be taken into account, so too will what your business does in general. Not every sector will be able to access the same professional indemnity insurance rates.
If you are a software developer, your business might be seen as less risky than if you are an architect. If you are an interior designer, you might be exposed to a smaller worst-case scenario than a solicitor. An insurer’s perception of this risk will affect the cost of your professional indemnity insurance.
Much of this will be based on historical precedent in your business sector. There are some professions where a claim will be more common, while there will be others where a claim may be less frequent but much larger.
Have you made any claims in the past?
If you have made any claims in the past, you will likely pay more for any new professional indemnity insurance you take out. This is even more likely to be true if you’ve claimed in recent years.
What excess are you willing to pay?
Your excess is the amount of a claim you agreed to pay at the start of the policy. Your insurer would then pay the rest. If you increase the size of your excess, this usually will make your premium cheaper.
What is the average cost of professional indemnity insurance?
Considering the range of businesses that might need professional indemnity insurance, from accountants and consultants to interior designers and recruitment agencies, and the number of variables affecting your premium, it can be hard to pin down an average cost.
Quotes for professional indemnity insurance can start from less than £5 a month but can cost thousands of pounds a year, depending on the combination of factors mentioned above.
» MORE: How much is business insurance?
Why is professional indemnity insurance so expensive?
If your professional indemnity insurance is expensive, it is likely reflecting the risk of your business being hit by a significant claim. This could be due to the historical precedent in your profession, the size of your specific business and the level of cover you require.
However, that doesn’t necessarily mean your professional indemnity insurance has to remain that expensive. By comparing quotes from different insurers, you might be able to get the same level of cover at a cheaper price.
Do I legally need professional indemnity insurance?
Unlike employers’ liability insurance, you aren’t legally required to have professional indemnity insurance. But you might still need to take a policy out as a condition of your membership to a professional or regulatory body that is vital to the functioning of your business.
Examples include the Financial Conduct Authority (FCA), the Solicitors Regulation Authority (SRA), and the Association of Chartered Certified Accountants (ACCA).
Even if this isn’t the case, professional indemnity insurance is something you may wish to consider if your organisation provides advice or consultancy services, provides designs to your clients, or deals with copyrighted materials.
» MORE: Who needs professional indemnity insurance?
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