What is sub-prime?

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According to a recent article in Insurance Times, the sub-prime lender UK Acorn Finance is seeking £14m plus interest from the insurer Markel in relation to professional indemnity (PI) claims made against one of Markel’s insureds, Colin Lilley Surveyors, which is now in liquidation. 

The coverage suggests that Markel is attempting to void the claims because it alleges that the surveying firm failed to disclose that it was working for sub-prime lenders when it renewed its PI policy in 2013.

Questions about surveyors doing work for sub-prime lenders were widely adopted by PI insurers following the Global Financial Crisis, in the belief that sub-prime lenders were more likely to make allegations of negligence against surveying firms.  The questions are still in use with most forms simply asking ‘do you undertake work for sub-prime lenders?’ 

A list of lenders that insurers define as ‘sub-prime’ has never, as far as we are aware, been developed or distributed.  So how can a surveying firm accurately answer the question and what exactly is a sub-prime lender?  We believe that the lack of a precise definition and/or list is resulting in many surveying firms responding that they do not undertake work for sub-prime lenders.  In light of the Markel case, this could lead to further attempts by insurers to void claims.

In addition to the danger of claims being voided, some insurers are trying to apply higher excesses to the work undertaken for lenders which they believe are sub-prime.  If a list of sub-prime lenders was distributed by insurers, surveying firms could take a proactive decision about who they work for, taking account of the potential impact of a higher self-insured excess. In the absence of that list surveying firms are not only in danger of being accused of non-disclosure it becomes impossible to accurately measure risk vs reward given the likelihood of a higher self-insured excess being retrospectively applied.

Insurance underwriters seem to base their definition of ‘sub-prime’ on the type of lending being done automatically classifying, for example, bridging loans as ‘sub-prime.’  Historic claims data partially supports the theory but not all short term loans can be classified as sub-prime and some short term lenders will also lend to non sub-prime borrowers so the application of a higher excess across all work done for a particular lender seems unnecessarily punitive. Furthermore this approach does not take account of who the lender is lending to, how the lender is funded and what sort of property the loan relates to.  All of these factors must be considered to accurately assess whether or not a loan is more or less likely to result in repossession which is ultimately what PI insurance underwriters should be concerned with.

Even when all these questions have been answered which is impossible without an explicit understanding of each and every lenders’ lending criteria, there remains a danger that the true extent of sub-prime lending is only revealed in a financial crisis at which point the term could be applied retrospectively.  Remember that a PI policy covers work done many year’s prior.

Until surveying firms are in a position to accurately answer the question about work for sub-prime lenders, we believe it should be removed from PI proposal forms. We also feel that the RICS should review the minimum PI wording to water down exclusions relating to non-disclosure on sub-prime lending. 

As to how insurance underwriters better measure risk; that all comes down to data and the sharing of data between lenders, panel managers, surveyors and insurers. Ideally the more onerous questions on a professional indemnity proposal form would be removed with surveying firms that undertake lending valuations printing off an annual report that summarises all the work they’ve undertaken in the previous year with a risk score associated with each job.  No easy task but perhaps there’s a tech firm out there that would like to give it a go?

About the author

Lance Rigby
Commercial Director