Professional indemnity: bargain hunt

There is good news. And there is better news. In the past year, professional
indemnity rates have come down by around 20% and most insurance brokers predict,
with capacity still growing and profits still rising, the rates will soften
again going into next year.

There is still no indication that the big hits Lloyd’s and the reinsurers
took on last year’s hurricanes have filtered through to professional indemnity.

For some, especially accountants outside the Top 50, this has meant a welcome
relief and the benefit has gone straight to their bottom line. Other larger
firms have used any premium savings to buy extra cover. Many of the larger
accountancy firms are buying cover that they could not get at any price three
years ago.

For the moment, at least, the hard times when PI insurance was not only
expensive, but difficult to get, seem to be behind the profession. Industry
sources suggest that for the average accountancy practice rates have slipped
from 2.5% of turnover to half that rate. For the larger firms, the slippage has
been less.

As Peter Burton, head of regulation policy at the ICAEW, says: ‘After 9/11
all PI rates hardened regardless, although insurers are feeling the pinch that
does not seem to be happening now. I am not sure that rates are going down as
fast as they have over the past two years, but there seems no indication that
they are going up. Only time will tell if this is part of a cycle or permanent.’

But while rates may have come down considerably for firms below the third
tier, those that are involved in the major audits, complex corporate and
international work have not enjoyed such fortune.

Whether you can lower your rates depends on the risk profile of the firm in
question. David Turner, an executive director at insurance broker Willis, says:
‘With the right risk profile, I believe that if you can demonstrate to
underwriters that you have a sound approach to risk management, and your loss
history reflects this, premium reductions are achievable.’

Play your cards right

A worthwhile exercise in negotiations with insurance companies is to compile
evidence for your case. ‘While it can be time consuming to submit detailed
information during renewal discussions, it is worthwhile since it enables your
broker to differentiate you from your peers, and often to negotiate a better
than average deal. I recently managed to realise a 30% premium reduction for an
accountant using this approach. We have relationships with many insurers with an
appetite to negotiate a deal,’ says Turner.

It is significant that major new players, such as Zurich, are trying to make
their mark on the market. But Gary Head, underwriting director of the
professional division at Hiscox Insurance, says: ‘Although there’s a flood of
new capital – the thought of easy pickings and underwriting profits has led to a
market softening by at least 25% over the past two years – some have forgotten
that this is long-tail business. It’s happened before and moving to save a
little bit of money now may not seem so clever in five years when the claims
come in.

‘Although this soft market may continue for some time, claims inflation has
not stopped. We may already have got to the stage where PI is technically
unprofitable. But at the moment there is a lot of choice and accountants can
shop around.’

Close the stable door

When it comes to all-important risk management, the insurance industry is
looking to accountants who have established a problem handling procedure. This
means a defined centre where all problems and complaints are not only
registered, but handled and not only handled, but handled promptly, so they do
not fester and pick-up costs.

In many markets, when prices soften buyers will shop around. Insurance
brokers are fiercely competitive and are only too happy to try and undercut each
other.

Because of the long-tail aspect of PI insurance, however, most accountants w
ill try and stay with the broker and insurer that is familiar with their
business.

But as Willis’ David Turner says: ‘They may not be moving, but they expect
the broker to do their stuff.’

Michael Snyder, senior partner at mid-tier firm Kingston Smith, says: ‘This
is a softening market, but we have not taken a reduction in premium, but an
extension of cover. At the top end of the market, because of the range of work,
there is not so much movement and although we looked carefully at our insurer
last year we didn’t do this.

‘My feeling is that rates will continue to stay rather flat not least because
although the numbers of claims does not go down, there has been no significant
increase in the price of settlements.’

Go for broker

It’s not just about how much savings you can make either. Alan Hubbard, head
of insurance at Mazars, says: ‘Buying this insurance is not like buying baked
beans, having a broker and, more important, an insurer who understands your
business is vital.

‘Brokers are always phoning up after your business, but they can never do
better than your existing broker. There are only a few underwriters in the
market and the brokers all go shopping at the same place.’

But just as accountants with different commercial exposure, risk and claims’
experience will have different PI insurance experience, so will those who are
involved with different types of business.

The insurance industry is understandably always most concerned about the last
big claim category. Just as, at one time, the misselling of pensions brought out
the underwriters’ magnifying glass, so today it is film finance and aggressive
tax planning that worry the insurance market.

Underwriters are only too aware that HM Revenue & Custom’s hostile
stance, especially in taking a retrogressive approach, could result in a wave of
claims and they are looking very carefully at those accountants who have a high
profile in these areas.