Insurers set to court Big Four

Link: Interview: Mike Rake

Speaking ahead of this week’s ambigious OFT verdict on the liability cap, Rake said firms might be able to look to the insurance market again. Because of the threat of huge claims, the Big Four currently operate captive insurance vehicles through which they insure themselves by setting aside as much as 5% of their revenues a year.

‘In five years, all other things being equal, the commercial guys will come back in big time,’ he said. ‘But they are not going to come in now.’

Rake said that a liability cap was crucial for this to happen – but warned that no one would be able to rely solely on commercial insurance. ‘Most of the firms would retain an element of captive insurance,’ he said.

Nevertheless, Rake also predicted that audit fees would rise again – significantly in some cases.

‘The audit fee rises we’ve seen are not enough,’ he said, pointing to the additional costs of staff conducting audits and the extra work being commissioned by audit committees.

‘As we move into the section 404 reviews in 2005, we’ll see significant increases in fees. The Big Four – with unlimited liability – will be asking for significant fee increases. In the US it will definitely be double-digit, outside of the US it will be less so.’

Rake said that the need for carrying out forensic work as part of the audit was also causing issues with some clients. ‘We are starting to do more investigation work as part of our audit work. Now the market expects us to be bloodhounds and that changes the relationship,’ he said.

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