How Risky Are Engineers?

There has been much discussion in recent Engineers Australia magazines about the need for more members to join their Professional Standards Scheme.

To support this call, this article examines our analysis of professional indemnity insurance claims data that we have collected from our experience with over 6,000 engineers' professional indemnity policies over the past 10 ½ years.

The Engineers Australia Professional Standards Scheme is one of few such schemes operating nationally in Australia. It is approved by the Professional Standards Council – a body administered in New South Wales but representative of all the States and Territories around Australia.

We have sought the views of a prominent underwriter of professional indemnity insurance in Australia to ascertain what some in the insurance industry think of Professional Standards Schemes.

David Porteous from Brooklyn Underwriting, a Lloyd's of London Underwriting Agency states:-

"As an underwriter of thousands of small to medium sized engineering professionals in Australia, we are critically aware of Professional Standard Schemes (PSS) and the risk mitigation framework that they provide for all professionals operating today.

Membership of a PSS demonstrates a commitment to an elevated standard of conduct in everything from day-to-day "professional" activities, including technical acumen, business ethics, professional development and risk management.

We believe that this framework is particularly important for our client base."

The above indicates that the underwriting fraternity in Australia consider your membership of a Professional Standards Scheme beneficial when considering your risk exposure.

During the last "hard" insurance market in 2001 – 2004 the existence of documented risk management strategies had a significant impact upon the ability of a firm to purchase professional indemnity insurance and continue in business protected. Some engineers, without such strategies in place, found professional indemnity insurance difficult to procure and in numerous cases were forced out of business.

The following graphs represent data gathered from more than 1,600 engineering firms who have taken out nearly 6,000 professional indemnity insurance policies during the past 10 ½ years.

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We have restricted our analysis to those firms with less than $10,000,000 in annual fee income. Firms above this have dramatically varying claims experience that can significantly distort the overall picture.
Our first graph demonstrates the average claim cost for the last 10 ½ years together with the frequency of claims against a firm depending upon their fee income. Claims experience should be considered in context of severity and frequency. As a measure of severity we have used the average incurred claim cost, representing the total amount paid plus any reserves outstanding. As the measure of frequency we have used the number of firms that have had claims (that have incurred costs) made against them. We have not adjusted the figures for inflation over the period.

Unfortunately, the reality of examining these figures is such that they do not take into consideration the number of engineering projects worked upon by a firm, differing types of clients, size of projects or the different types of services provided. Hence we can only make broad assumptions as to what these figures may show us as to what may occur in the future.

The above indicates that the expected greatest severity is typically experienced in firms with a fee income of between $2M and $10M where history has identified an average claims cost of more than $127,000.

Likewise the frequency of claims arising in such firms is also the highest of this industry segment where over the 10 ½ year period it is more than 55% probable that a claim will be made against the firm.

The reasons for this could be simply that larger firms do more work and therefore could have a higher frequency of claims. Or it may relate to the potential risk that the principals of a firm of this size do not have the ability to micro manage each project.

The above illustrates that, based upon these historical averages, in the next 4 years 1 in 5 engineering firms with a fee income between $2M and $10M may have a claim and on average the claims cost will be more than $127,000.

As can also be seen from the above analysis small firms with less than $250,000 fee income, which generally represent sole practitioner firms, have the least anticipated cost of claims and also the least frequency expectation. Conversely this may be as a result of a lesser volume of work or a greater degree of micro management.

Interestingly across the three categories between $250,000 and $2,000,000 fee income, average claim severity does not vary dramatically. However as firm size increases there is an increase in claims frequency. Once again we can only surmise the reason for this. Are claims simply a function of the volume of engineering services provided or do they relate to the quality of management? Over the last 10.5 years, the likelihood of a firm with more than $500,000 fee income of having a claim was greater than 50% more than that of a smaller firm. This could be expressed as expecting a claim to arise against 1 out of every 10 engineering firms of this size every four years!

Irrespective of the reasons for these claims results the above figures strongly suggest that there exists a claim frequency that should be of concern to all engineering firms and one that demands more action on risk management to be adopted.

One major risk management measure is membership of a Professional Standards Scheme where eligibility for membership of the scheme requires you to identify what risk management strategies you currently employ, further, applying for membership will provide you with some suggested solutions if your current policies and procedures do not meet the scheme "standard".

A firm's risk is of course dependent upon the type of engineering services performed as our next graph demonstrates. The graph below represents the engineering discipline that has given rise to a claim. It measures both the total value of all claims we have recorded over the past 10 ½ years as well as the proportion of the total number of claims received.

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Our portfolio of clients is very diverse and we believe reasonably represents a cross section of the population of professional engineering firms purchasing professional indemnity insurance.

Once again it is difficult to analyse the above graph in too much depth as it should be measured against the total amount of professional services supplied in each discipline. However, as a "quick reference" it does reflect what the insurance industry have been highlighting for many years!

The discipline that has given rise to the greatest proportion of claims is civil engineering representing nearly 65% of all claims followed closely by structural engineering. We have excluded those services where claims proportion dropped below 0.5%.

To further illustrate the claims profile of the engineering profession we have identified the major causes of claims as per the following chart.

The scope of services you provide will also determine the frequency of claims that may affect your business as set out within this next graph. If you provide services in those areas that have higher frequency or severity risk then you definitely need to examine your risk management practices and compare these against the requirements of the Professional Standards Scheme.

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If your business provides any of the above services then please take note and explore the professional standards scheme promoted by Engineers Australia.

One fortunate aspect of the professional indemnity insurance market enjoyed by engineers over the past 10 years has been its continued competitiveness. Even now we still see additional capital entering the reinsurance markets which in turn increases the ability of retail insurers to expand their product offering and capacity to take on risk. This continued increase in supply maintains downward pressure on premiums such that we believe some underwriters are taking on risks and/or offering broad policy coverage and low excesses at unsustainable premium levels.

One of the most significant issues is the willingness of some professional indemnity insurers to offer full "contractual liability" cover. When this last occurred it was not long before the collapse of HIH which precipitated the last "hard market" and before that the very same extension to the insurance was introduced just prior to the previous "hard market"!

In very recent times, following some underwriters negotiations with their re-insurers for 30th June renewal of their authorities, we have been made aware of the significant pressure being applied to achieve premium increases of 30%+ for structural and civil engineers. Another underwriter has advised us that they will not be offering renewal at all for a certain segments of their portfolio due to adverse claims experience.

Whilst we do not have any concerns regarding our ability to arrange alternative insurers for these risks it is indicative of the small signs that are emerging of the insurance market beginning to "harden" when it comes to the engineering profession.

During the last "hard market" the key to securing professional indemnity insurance for engineers was our ability to highlight to the insurer the firms risk management procedures. Being a member of the professional standards scheme clearly demonstrates this with the added benefit that your liability is capped to a monetary limit.

Many engineers that we have talked to about joining the professional standards scheme have been daunted by the effort that was involved in joining. We now understand that the Management Committee of the Engineers Australia Professional Standards Scheme has streamlined this process, incorporated the risk management requirements into the Chartered continuing professional development requirements and generally made the application a breeze!

You no longer have any excuses for not joining the Engineering, Science and Technology Professional Standards Scheme. Type the following link into your web browser now!

https://www.engineersaustralia.org.au/professional-standards-scheme

To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on the above information you should obtain advice specific to your needs.

Chris Bovill is a principal of professional indemnity broker, Bovill Risk & Insurance Consultants Pty Ltd (BRIC). BRIC are specialist professional indemnity Insurance Brokers for engineers and are the only recommended provider of insurance broking services to Engineers Australia members.

 

Chris Bovill is also a member of the management committee of the Engineering, Science and Technology Professional Standards Scheme.

If you would like further information on this topic you can contact Chris at This e-mail address is being protected from spambots. You need JavaScript enabled to view it  or phone 1800 077 933.

 

 
 

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