Lockton's Ian Saxelby, assistant vice president, global professional & financial risk, discusses how accountants can best navigate the changes to Professional Indemnity Insurance (PII).
For a decade or more, Professional Indemnity Insurance (PII) has been a tick-box exercise for accountants. Vital cover could be secured by sending an email or through a quick call to an insurance broker.
But times are changing. A toughening insurance market has disrupted the status quo. Simply put, it is now much more challenging for accountants to secure the coverage that is a necessity for them to do business.
We have enjoyed a ‘soft’ insurance market for quite a while, where coverage has been inexpensive and underwriters happy to cover most practices. But recent large claims have led to a shrinking pool of available insurers, which in turn has pushed up the price of premiums.
Practitioners may have noticed this particularly in the last 18 months, with premiums rising on average upwards of 10% (but in some cases by as much as 300% where there has been a large loss or regulatory issue).
The challenges facing insurers have diminished their appetite for underwriting PII. This has been exacerbated by a series of high profile cases of malpractice within the accountancy profession. In the first part of this year, investigations by the Financial Reporting Council (FRC) into audits carried out by the Big Four resulted in astronomic fines. This has prompted a wider review by the Competition and Markets Authority (CMA) and a proposed split between their audit and non-audit businesses to prevent conflicts of interest.
These events have caused a ripple effect throughout the wider accountancy profession. They have resulted in increased caution on the part of insurers whose heightened sensitivity and dampened appetite for risk have made it more difficult for small to mid-size accountancy firms to secure PII coverage.
This is particularly true for accountancy firms that overlap with the financial services sector. It is noticeable that underwriters are approaching activities such as pensions and investments, corporate finance, tax mitigation and overseas work with increasing caution as a result of notified claims and circumstances which have crystallised recently. In more extreme cases accountants have been turned away by insurers for the first time because of their close business ties to these activities.
While it has become more challenging, securing cover is not an insurmountable task for accountancy firms. There is no silver bullet but practitioners may rightfully be contemplating what proactive steps they can take to avoid complications in securing PII.
In the current landscape, firms now have to spend more time and effort creating a case for an underwriter or they risk being faced with significant hikes in premiums or worse, not being able to find an insurer to cover their business altogether. Here are some key considerations to take into account as the renewal process approaches:
Don’t 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 so the whole story of a business is presented upfront. 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. Also, if a firm undertakes overseas activities, the extent of these should be detailed.
In the recent past, a proposal form may have been enough to secure cover. But now, we advise developing a cover letter that goes beyond the facts and figures to share a wider, more personal view. This is the place to tell the story of the company: how it has traded in the past and any goals that have been set for the future. It also enables companies to share softer facts around its culture and values, illustrating how it works with colleagues and clients.
As underwriters approach PII with added caution, they 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.
If there are notable developments in the business, providing the full context of these is crucial. 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.
Many accountancy firms will have a broker they tend to work with for PII renewals, but the way a broker and an accountancy firm works together is evolving. Brokers today need to be sure that no information is missing – gaps in the PII submission process will put them on the back foot. Another consideration is timing – while in the past, a form could be sent to a broker one week before the policy period was up, we recommend that firms send information four to six weeks in advance, enabling them to secure the best terms.
Overall, securing PII requires a complete reassessment in how accountants approach the process, calling for better attention to detail, more effort and more proactive engagement.
Accountants who give themselves enough time to complete the process with as much detail as possible are the ones who will go on to get the most affordable rates with the best policy terms and conditions.