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Depending on your business, professional indemnity insurance can be a notable expense. What’s more, in recent years, premiums have risen. That’s why it is important to understand why your policy costs what it does, and any ways you could reduce your premium.
Read on to find out how the cost of professional indemnity insurance is calculated, why it can be expensive, and whether or not you might need it.
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?
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 doesn’t cover your organisation if things go wrong.
One way to try to work out how much cover you need is to consider the absolute worst-case scenario for your specific business. That might mean anything from negligent advice to a breach of customer data, and how much might that cost in legal fees and compensation.
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 cover you add.
For certain professions and projects, you may need to have a minimum level of cover set by regulatory or membership bodies or clients.
» MORE: What is professional indemnity insurance?
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.
Even so, the premium is likely to be a larger part of a small business’s turnover.
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 may 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, to how your business is structured, and the levels of risk management you carry out.
What does your business do?
Your occupation and the sector you’re in will help decide your premium. Not every sector will be able to access the same professional indemnity insurance rates.
If you are a software developer, your business may be seen as less risky than if you are an architect. If you are an interior designer, you may be exposed to a smaller worst-case scenario than a solicitor. An insurer’s view 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 agree to pay towards a payout after you make a valid claim. Your insurer would then pay the rest. If you increase the size of your excess, this usually will make your premium lower. Make sure it’s affordable, though.
What is the average cost of professional indemnity insurance?
Considering the range of businesses that may 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 it can cost far more than that, 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.
It’s worth knowing that the cost of professional indemnity insurance has increased in recent years. In a 2022 Federation of Small Businesses survey, 62% of small businesses with professional indemnity insurance said that their premiums have increased in the last year. This rose to 71% of small firms in the professional and scientific sector.
But that doesn’t necessarily mean your professional indemnity insurance has to be or to remain that expensive. By comparing quotes from different insurers, you may be able to get the same level of cover at a cheaper price. Also bear in mind that business insurance is an allowable expense, so you can deduct it from your income when working out your taxable profits.
Do I legally need professional indemnity insurance?
Unlike employers’ liability insurance, there is no legal requirement to have professional indemnity insurance. But you may 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, you may want to consider professional indemnity insurance if you provide advice or consultancy services, provide designs to clients, or deal with copyrighted materials.
» MORE: Who needs professional indemnity insurance?
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