Are you finding it harder to obtain PII cover? We look at why the market is hardening.
Recent editions of In Practice have seen articles by Lockton about the shift in the Professional Indemnity Insurance (PII) market that is seeing premiums rising and some accountants finding it more difficult to obtain PII for their practices. To find out more about the situation, Pat Delbridge (member engagement manager at ACCA) spoke to Catherine Davis (ACCA relationship manager at Lockton).
Pat: Is it only the accountancy sector being affected by the hardening of the PII market?
Catherine: Whilst other sectors have been affected by the hard market conditions for some time, they have not only been seeing premium increases but also finding it difficult to obtain appropriate or compliant cover for some activities. Many insurers have reduced their market capacity and are offering lower limits of indemnity. The number of insurers in the excess layer market has also reduced and premiums have increased significantly.
Independent Financial Advisers (IFAs) have been affected by market capacity, there are now less than half a dozen insurers willing to provide terms. Many IFAs have seen increases of up to 150% over the past few years. DBTs (Defined Benefit Pension Transfers) are an issue attracting an increased rate and often limited cover. It’s worth mentioning that IFAs’ cover has been underwritten on an aggregate limit for a number of years (and not any one claim).
Solicitors have generally seen a 10% to 20% increase over the last year or so. However, a number of insurers have now withdrawn from the market.
Surveyors have generally seen a 5-10% premium rate increase, but those undertaking mortgage valuation work or been involved where ‘cladding’ has been used will have seen higher increases.
In the design & construct sector, insurers are offering lower limits of indemnity, often on an aggregate basis. Again, cladding exposure is an issue.
Accountants are generally seeing a 5-10% increase; however, we have experienced increases of up to 300% where there have been claims and higher risk activities such as tax mitigation advice or corporate finance. Some insurers are offering lower limits of indemnity.
Pat: How is Lockton looking after ACCA practices in this current climate?
Catherine: We are reviewing each case individually and using our expertise and experience to make sure that adequate cover is maintained at a realistic premium where possible.
Pat: Is there anything that practices can do to minimise premium increases?
Catherine: Start the renewal process early – complete and return your proposal form well in advance so if there are any issues there will be enough time to resolve them or seek alternatives. Do not fall into the trap of treating the PII proposal form as a quick tick-box exercise. While policy application forms should be concise and clear, they must be filled in comprehensively. It sounds obvious but where there is space to provide more detail, it should always be included.
Examples include submitting a full commentary on tax schemes and for financial services firms in particular, sharing chapter and verse on how pension and investment services are conducted. In addition, if a firm undertakes overseas activities, the extent of these should be detailed.
If there are notable developments in the business, providing the full context of these is important. For example, if the largest single fee received from any one client increases from £25,000 to £100,000 in a single year, therefore incurring higher risk, it is important for the underwriter to understand if this is a one-off or the norm. If this is the new normal, then there is a need to articulate how this might affect business going forward.
Insurers need to understand the core business fundamentals but also the ‘softer facts’ like details on risk management practices and corporate governance protocols. Being proactive with detail is key in this new environment.
Letters of engagement – these are important as they form the basis of your contract with your client and therefore need to be in place and up to date. Make sure letters of engagement cover the scope of work agreed and are updated regularly to include any new areas of work. Limit your liability to an agreed and reasonable level. Often policyholders use their limit of indemnity as a maximum cap.
Operational procedures – increasingly now, insurers are asking about the firm’s operational procedures, checks and supervision. This is to ensure that there is adequate risk management in place to reduce the likelihood of any errors, omissions or fraud. Factors insurers will be interested in include:
your management structure/hierarchy explaining how staff are supervised and how quality control is exercised
do you obtain references when employing staff? Is there a documented training programme in place and is CPD recorded?
do you operate an accessible diary system to ensure that deadlines are met?
do you have a compliance officer who regularly audits your files?
does your firm handle client money and how often do you check your cashbooks and bank accounts? Are these independently reviewed and reconciled against bank statements?
is there a dual sign off procedure in place for financial transactions?
is there a business interruption plan in place?
Evidence of a well-run, efficient practice will only be to your advantage.
Activities that will attract a higher premium rate include or require additional information:
corporate finance work
financial services, Investment advice or pension advice
mergers, acquisitions and disposals
Types of client that may attract a higher premium rate or require additional information:
If there have been claims or circumstances notified, insurers will want to know the cause and outcome. It is possible to improve the situation by letting insurers know what subsequent actions you have taken to prevent a reoccurrence, for example have you had your files independently audited or reviewed to ensure there are no further matters of a similar nature, or have you put additional checks and procedures in place.
With higher risk activities insurers will be interested in the qualifications and experience of the individual carrying out this work and whether independent specialist advice is sought. A CV can also be helpful.
Pat: We are hearing of some policies being offered in the market with surprisingly low premiums which might be due to reduced cover. What should practitioners look out for in terms of watered-down or missing clauses?
Catherine: It is not only important to look at what is missing from the cover offered but also to review the basis of the cover offered.
Ideally, your limit of indemnity should be ANY ONE CLAIM with defence costs in addition. Be mindful that some providers may offer cover that is in the aggregate or defence costs inclusive.
The policy excess usually applies to each and every claim excluding defence costs – look out for policies that apply the excess to defence costs or on an each and every claimant basis.
Make sure the policy is ‘civil liability’ wording, and not a ‘negligence’ only wording - check the insuring clause or ‘what is covered’ section of the policy wording (or ask your broker to do this for you). You must have a civil liability wording to comply with ACCA regulations.
Other cover that may be missing in budget policies may include:
defence costs for disciplinary or regulatory investigations
mitigation of loss clause where insurers will pay certain costs in the likelihood of preventing a larger claim
awards by Ombudsman cover
data protection defence costs
fidelity/fraud or dishonesty cover is often not covered or may be limited or on an aggregate basis
helplines (many insurers offer these for confidential claims advice), tax advice, counselling, employment, business law etc
Pat: Do you think that this hardening of the PI market is going to ease in the short term?
Catherine: The hard market hit other professions before accountants and those other professions have taken the initial increase and have seen year on year increases of about 5% since. Therefore, we do not see this as a temporary blip for accountants, although we may see rates stabilise whilst insurers reassess profitability.