Professional indemnity insurance, designed to protect businesses from harm, is now threatening the profitability of engineering companies and consultancies. What’s being done?
At structural, facade and civil engineering consultancy Xavier Knight, growth has been impressive. Over the last five years the business has expanded from a small team of eight to more than 40 staff. It’s an engineering success story.
Unfortunately, the growth of one particular cost has far outstripped growth in profitability: the cost of professional indemnity insurance (PII).
Last financial year, the consultancy’s revenue increased by 11 per cent. In the same period, the company’s PII, having already been on a steep upwards trajectory over several years, blew out by another 42 per cent.
“We have seen a steady and significant increase in our premiums and when it came to renewing in March this year, the same thing happened,” Jyana Mareko, General Manager of Xavier Knight Consulting Engineers told create.
“I was blown away by the increase. If you have made a claim or if there’s higher risk around what you’re doing, you would expect premiums to rise. But when there are no risk changes, seeing a premium increase like this seems unreasonable.”
In a statement provided to create, the Insurance Council of Australia outlined the insurance industry’s reasoning behind the dramatic rises in PII premiums.
It said there would only be a change “when risk is better understood and when those risks are effectively managed”.
“Insurance premiums represent the cost of risk. Where claims expense is high and growing or where risk is not mitigated, the premium attributable will be higher. The quality of output across the Australian building industry has seen increased claims exposure particularly in recent years,” according to the statement.
“In the professional services sector of the building industry, PII has experienced premium increases and cover limitations have been applied in some segments. A key driver of increases and/or limitations is the recent claims experience. PII has reported a loss ratio of 95 per cent or worse for the past three years.
“More than that, in the period 2017-2021, PII claims increased by 125 per cent while premiums grew by 63 per cent. This highlights that premiums have risen, however, those rises are not matching the cost of risk of the performance of services produced in that industry segment.”
What is Engineers Australia doing?
Engineers Australia recognises this as a major issue affecting engineering companies large and small, and has been working on a multi-stage solution, said Chartered engineer Baoying Tong CPEng, Engineers Australia’s Senior Manager – Building Reform and Projects.
“In attracting the insurers back, it’s important for us to improve the risk profile of engineering and engineering-based industries,” Tong said.
Similar challenges to those in the building and construction industries are being faced in the mining and amusement park sectors, Tong said. As in the construction industry, both these sectors have experienced high profile and controversial failures over the last several years.
“It may seem that the insurance industry is being too reactive, with some insurers who will not underwrite engineering until the risk is dramatically reduced,” he said.
“But there are also innovative and proactive insurers who are interested in the work Engineers Australia is doing. They’ll recognise early that the risk profile has changed, and they will come back and win market share before the others realise.
“Engineers Australia has been running a consultation process with members, with insurance companies and with the Insurance Council of Australia and other stakeholders. As part of this process, Engineers Australia has started with a three-stage action plan designed to help restore balance in the insurance market.”
The action plan, as outlined on the dedicated Engineers Australia web portal, was developed to provide engineers with resources to address the issue. It includes:
- Stage one: short-term goals, including forming partnerships with key stakeholders, organising industry discussions to focus on the most affected engineering sectors and helping members to gain a better understanding of the insurance market
- Stage two: set for the medium term, this includes working with insurers to identify key risk areas, developing risk management protocols and encouraging insurers to determine fair risk allocation linked to Engineers Australia’s Chartered membership grade
- Stage three: the long-term plan is to promote a culture shift around risk allocation and accountability in targeted engineering sectors
The government’s view
Taking the building industry as an example, what we’ve seen for too long is lax standards of work by certain practitioners, said Angus Abadee, Director of Building Construction Policy in the NSW Government’s Better Regulation Division.
“This has led to higher rates of defects,” Abadee said. “Our department has commissioned universities to conduct research programs and they indicate that around 30 per cent of Class 2 buildings [multi-unit residential developments] contain defects.”
The effect is that such buildings, and the people and businesses involved in designing and constructing them, become a very difficult risk proposition for insurers.
“Most insurers have suffered pretty heavy losses on their construction PII portfolios,” said Nick Beswick, former Product Leader Professional Indemnity APAC at AXA XL. “The main areas that are problematic are structural engineering and geotech work.”
The real problems for insurers, Beswick said, come out of complex structures such as high-rises or complex bridge or tunnel projects.
“PI insurers have, for a long time, grappled to deal with those things, partly because of market dynamics and over 15 years of a soft market, where rates were really low and competition was high,” he said.
“In the last three to four years, rates have been increasing significantly. People describe it as a ‘PI crisis’, but it isn’t. The PI crisis was 10 years ago when no one was charging enough money and people were losing their shirts. That set up the conditions for what’s happening now.”
Another historical cause of the PII affordability problem, Abadee said, is the broad, hands-off approach the construction sector has taken to responsibility and accountability over a number of years.
“This is punishing the good practitioners by making the cost of business prohibitive,” he said.
The approach from a regulatory perspective is to prevent the problems before they happen. This involves picking up defects in the design phase and putting in place clear accountabilities around who carried out a piece of work and what their involvement in the project was, therefore limiting their liabilities.
Taking NSW as an example, the regulatory response is multi-faceted. It includes an entirely new insurance product that the NSW Government is designing with the insurance industry — a decennial (lasting for 10 years) liability insurance product that will be attached to a building for a decade, but paid for upfront.
“First point, we’re introducing registration schemes similar to [what is in place] in Queensland for all engineers working in the construction space,” Abadee said about the action being taken in NSW for the Class 2 multi-residential unit, and mixed use development with a Class 2 part, building sector.
“We’ve also introduced a new design and building declaration scheme. This means before building work begins on any critical building elements [in a Class 2 structure], whether that be structure, fire safety systems, waterproofing, etc., a registered design practitioner must sign off, confirming the work complies with the Building Code of Australia. Those designs are lodged on the NSW Planning portal, then the building practitioner must build in accordance with those designs.”
No substitution or alteration by the building practitioner is allowed without a qualified engineer signing off, he said.
“Previously, changes to design were being made on the fly,” Abadee said. “That’s what we want to push out of the industry.
“We want people to plan to integrate designs and to get it right from the start. The benefit of that is that it will clearly show, if there is a defect, whether it was caused by insufficient or inappropriate design, or was the builder not following the design.”
And the industry is starting to see change because of this renewed focus on accountability and trustworthy players.
“At a sector level, we understand that PI pricing in NSW is now up to 30 per cent lower than the national average. That shows the work we’re doing as a government to manage risk is starting to have an impact,” Abadee said.
Engineering requires cultural change
While it’s easy to point the finger at some insurers for not knowing enough about the ins and outs of engineering, the current insurance crisis also offers engineers a chance to figure out what they could do better, and what they could change, to help reduce the risk profile of the profession.
Engineers Australia Fellow and Chartered engineer Greg Schofield FIEAust CPEng, founding director of structural engineering consulting business Greg Schofield & Associates, said there is a long history of “givers and takers” in the engineering business, which has damaged the profession’s standing with insurers.
“Not long ago I had $10 million of PI cover for about $12,000,” Schofield, a past chair of Engineers Australia’s Management Committee of the Engineering, Science and Technology Professional Standards Society, said.
“That snuck up to $16,000, then jumped to $25,000, and this year it’s about $31,000 but only offers $5 million cover.
“A lot of the problem came from the idea that if a project stuffed up, you could just sue the design engineer.
“The givers were dills like me, designers who shouldered responsibilities under the cover of PI, so at the drop of a handkerchief you’d be sued.”
How, then, does the engineering profession collectively reduce its risk?
That begins with the development of a risk management system, Schofield said, an internal framework of checking designs and changes, with a robust feedback system that is multi-dimensional.
According to Schofield, a linear checking system is not enough.
“It has to be multi-dimensional. There has to be personal checking, organisational checking, independent third-party checking, with strong collegiality between members who all share responsibility.”
Such a system would not only address risk issues in the profession, but would also help develop a culture of commitment to mitigate risk, rather than a culture that automatically reaches for the legal lever.
One of the ways that government is looking to work with industry to progress this is by developing a whole-of-construction-sector engineering practice standard.
“A clear, consistent set of obligations will allow engineers to better manage risk,” Abadee said.
In NSW, the government is also encouraging industry bodies to create Professional Standards Schemes (PSS). Abadee noted that some associations, such as the Australian Institute of Building Surveyors and the Strata Community Association, have established a new PSS. Engineers Australia is drawing on its experience of operating a PSS in every state and territory from 2008-2016 and is currently investigating the feasibility of reintroducing a PSS in the current context.
Solutions needed at all levels
Beyond factors such as a hardened market cycle in global insurance, limited insurance competition in Australia and global monetary policy, there are solutions that Engineers Australia is facilitating.
It begins with the work practices of individuals and businesses, including developing a culture of risk mitigation and risk management, and encouraging insurers to become more familiar with the way engineers work.
“Everybody has a part to play and at Engineers Australia we’re well advanced with stage one of our action plan and have already developed some guidelines under stage two to help address and solve this issue for our members,” Tong said.
“We recently made a submission to a major consultation process being run by the Insurance Council of Australia, which we wholeheartedly supported as an important step for further collaboration. We’re now having several follow-up conversations to turn recommendations into actions.
“We know this is a very big issue for our members, so it’s a priority. The fundamental solution within engineering will be around exceptional risk management. If we don’t develop an excellent risk management approach that not only works for engineers, but also meets the needs of their insurers, history will keep repeating itself and engineers will continue to face the same old problems.”
For professional indemnity insurance designed for the engineering profession, by the engineering profession, visit EngInsure, an Engineers Australia initiative.
EA is doing good work, but it is not sufficient in the current climate. Also the work has started too late. It is a pity that EA did not realize the problem earlier and has failed to support independent contractors and consulting engineers earlier in this issue. One of the problems of insufficient detailing of design drawings also involves under-cutting by our own brothers in bid to win the job at any cost. EA has failed in its duty to legalize the consultant fees (similar to Medical, Legal, and Accounting Professional Associations. These problems are occurring and gathering pace since I joined EA 40 years ago! However, it is better late than never! We hope that EA will succeed in standing up for the members and convincing the Government and other stakeholders in reforming the profession and making it a desired profession before the members leave EA en-mass.
P.Parghi
You are spot-on regarding Engineers not appropriately valuing the professional service they provide. Engineers have been their own worst financial enemy at least as long as I’ve been an engineer – 34 years. Over that time I’ve spent many, many years engaging lawyers and accountants to provide services and it never ceases to amaze me that company leaders will happily agree to the fees they charge but when the engineers submit their fees, the same people baulk at them. EA must finally figure out how to effectively advocate for engineers’ fees that reflect the value of the work they do, it is certainly no less than the other professions mentioned – and engineers have to stop undercutting each other! Until this occurs, many (most?) of our brightest young engineers will leave the profession for another that appropriately rewards them.
Couldn’t agree more.
Some years ago I needed PI for a project I worked on. The quotation from Australian insurer was in excess of $15,000. The quotation from a UK insurer was less than 800 pounds.
Both quotations were just for one project with a limited time span, and for work performed only on that project. The exchange rate was roughly 2:1. Both insurers were well known, reputable large organizations.
Till this day I do not understand why the cost of insurance differed by a factor of 10…
I am still trying to get PII coverage because of my previous line of work in Aerospace Engineering. I have never had any claims against me, but because my experience is with aircraft the insurance companies won’t look at me. I am now doing Systems Engineering (Requirements Engineering) and only require 2mil, but I can’t get any quotes.
I am aan aeronautical consultant. I have no personal experience of a PII claim, however my knowledge of such things relates to an aeronautical consultant quite a few years ago who carried PII and got sued by a “gentleman” who sued him on fairly spurious grounds. The insurance company paid the claim which was not a lot more than the insurance excess with the result that he paid the excess, the insurance company got off lightly and they did not contest the claim. My peers in the industry and myself have largely not carried PII since that time, and far from helping, insurance seems to attract litigation of a type that insurance companies do not consider worth fighting.
A useful set of questions of insurance companies would include what proportion of cases do they contest and of those that they do not, what is the proportion of costs incurred by customers and what by the insurance company, and all within the context of total claims and total payouts.
PII is not a complete answer in itself. It can contribute to reputational damage and drive up costs for no good reason.
Not only the premium are rising steeply, so is the delay on obtaining competitive quotes. It took us 3 months to finalise the PI Insurance for current financial year.
Insurance companies provides no transparency or justification for steep hike in PI.
We the consumer, end up getting frustrated with no real help from IE Aust.
IE Australia certainly can lift its game and don’t hide behind curtain of red tape policy and procedures.
Where is Greg Schofield getting his PII, that’s a fantastic premium…. 8 years ago we had 2 million dollars cover for an annual premium less than 10k, now we pay over 40k. That overhead costs us the ability to offer a young trainee a job.
The best risk mitigation strategy is trying to only work with competent clients, but you can’t always sort the wheat from the chaff in the residential sector.
Regardless of risk management strategies, if a client gets their heart set on pursuing legal action there is nothing the industry can do to avoid lengthy and costly legal arguments irrespective of right or wrong.
Regulation must be improved to require engineering inspection of critical elements in all building classifications to improve building outcomes and assurance for the PI industry.
This annoys me a lot, and I will assume I’m no the only one!
“Stage two: set for the medium term, this includes working with insurers to identify key risk areas, developing risk management protocols and encouraging insurers to determine fair risk allocation linked to Engineers Australia’s Chartered membership grade”
Engineering industries need to be independently reviewed based on risk, but as much as you’d like to think it does, CPEng is not the answer. not having CPEng does not mean no competence as much as you like to think it is…. plus you are talking about individuals, what about companies… can I register my company of 100 engineers to be “CPEng” competent…. In my company of 100 engineers 20% are members of EA, because the 80% come to the conclusion that EA do nothing for them and why pay the bill!… so basically you want to tie insurance reduction into paying for memberships at CPEng because that suddenly makes things safer/less risk?
Yes, well said Thomas, this has to be an error or better thought through, I worry that these are the outcomes when the EA takes a bigger and more informative role at the table, ofcourse they would tie EA chartership into reduced premiums. Although I have to say that create magazine as part of EA is actually very good.
What appears to be missing from this strategy is minimisation of “collateral damage” resulting from very poor risk categorisation and differentiation across the various Engineering disciplines. The impact of materially high risk in the construction industry on unrelated Engineering disciplines with totally different risk profiles has been profound. It this respect, quite frankly, it is perfectly valid to point the finger at the Insurance Industry. The Insurance Industry appears to lack the sophistication (or will) to distinguish anything but superficial differences in risk profile, and this is where EA (which should have this knowledge) SHOULD have and apply significant leverage to affect education and change.
At the moment, no matter how good your risk management processes are (or your actual risk profile), in many cases it is simply impossible to get insured. This is the crisis that needs to be urgently addressed.
I am a structural engineer mainly in the housing sector.
My insurance has gone up 10 fold in the last year. I was told by my broker that its because there are now only a few underwriters operating in Australia.
He said building surveyors are in same position.
PI premium rises has been an issue for 2 years now and very little is being done, particularly for the smaller firms.
I have found that risk management actually has little effect on the premium.
Consultancies providing professional engineering services for the Energy industry are facing high PII premiums, and considering that engineers will play a vital role in the energy transition to a net-zero energy system, these high PII premiums will adversely impact the support that is required from these consultancies for this transition.
The real problem with engineering failures that cause insurance companies to increase insurance premiums is that too often builders just don’t build what engineers design and document. There is no requirement in WA where I operate for a builder to employ the design or an other engineer to ensure design is satisfied or that there is adequate QA/QC. I have been Superintendent over projects constructed by Australia’s “finest” ; sadly they operated unprofessionally and could not deliver on time, to quality or to budget. Our PI insurers also don’t understant the profession – just work your way through their amateurish PI application forms and you quickly realise that. Maybe the industry should self-insure??
In one of my previous civil drainage designs, the owner of the house raised a claim against me (for two units of civil drainage design), the building surveyor, the structural engineer, the steel frame guy, and the plumber, Because the builder liquidated. Blender mistake I can see onsite instead of two units they built one unit at the back, and the front unit has not been constructed yet. site sloping to the back. So the rainwater going to the back unit.
Now this case is in court judge from VCAT said if you want, you can go for a trial run. But my lawyer says if you go for a trial run the costs for a trial run is more than to settle the case. But I am not happy about this.
My lawyer says that due to over costs PII insurance can pull out from this so I have to pay for the trial run costs. So I am accepting to settlement which might increase my PII premium from next year, is there any proper solution for this?
Here I want justice from two sides as I know:
First, The engineers who wrote the report against me they just trying to show there was a mistake better there should be proper engineering support for VCAT to understand the situation otherwise no one will get 100% justice.
Second, all engineers need basic information about this insurance policy. Is there any chance the insurance pull out of this case without providing legal support to final justice?
Please let me know, is there any solution for it or I have to accept for settlement by the end of this month.