Professional indemnity (PI) insurance provides essential financial protection for accountants against potential losses that can happen due to negligent acts, errors and omissions that might occur when providing professional advice to clients. Your insurance policy will cover claims regardless of whether there is any liability.
It is worth noting that even if there is no liability involved, the defence of these issues can be costly, so it is extremely important for accountants to have reliable cover in place.
Tougher market
Following a relatively benign couple of years, the Pl market is now undergoing a tough period where many insurers have reduced their market capacity and are now offering lower limits of indemnity.
The number of insurers in the market has also reduced, with many withdrawing from the market altogether – including Lloyd’s syndicates. This has led to a significant increase in premiums, with no sign of the market stabilising any time soon.
After its Thematic Review in 2018, Lloyd’s instructed its syndicates to take necessary remedial action on their loss-making lines. In many instances, this included PI and has led to a number of insurers deciding to exit the market.
This is in sharp contrast to the situation that had prevailed for many years, when overcapacity in the Pl market resulted in a broad range of coverage and lower premiums. This was unsustainable due to the continuous rise in claims and, therefore, insurers had to battle it out to turn a profit.
Premium prices
Insurers who have not completely exited the PI market have instead reduced their appetite, and increased their premiums and their excesses. In some cases, premiums have increased by over 100%, with an average rise of 25%.
Taxation still dominates in relation to the volume of claims and we are now seeing a larger number of issues that result in settlements as high as six-figure sums.
Consultancy and management consultancy are also areas of increasing notifications, as are fraud and dishonesty from accountancy practice clients.
The uncertainty in the current political climate is also not helping the situation as cautious attitudes are even more common during times of potential economic downturn. This affects underwriters’ decisions, making them more selective about the risks that they are willing to accept.
Create a strong defence
Despite these challenges, there are a number of measures accountants can put in place to protect themselves. Good risk management and quality standards within practices can provide strong defence in the event of a claim being made, while being able to demonstrate clearly established procedures for assessing and managing cases – which are communicated and understood widely – is critical.
In addition to this, a good track record and a well-managed firm will still be able to get reliable cover at a reasonable price.
However, firms engaged in high-risk activity may find this more difficult and will need to forward additional information.
Typically, insurers view higher risk areas as including tax avoidance schemes, plcs, financial institutions, entertainment clients, mergers and acquisitions (depending on size and complexity), and insolvency and financial services (life and pensions).
Firms that previously had claims or incidents will need to be able to demonstrate what measures they have put in place in order to prevent future occurrences. These can include no longer being involved in the work that caused the claim; better procedures and systems for checking all documentation is correct; and issuing letters of engagement on all jobs, clearly stating the activities that will be carried out.
Get organised
While the current market is challenging, it is important that every firm addresses the professional indemnity issue in good time and does not leave it to the last minute to obtain terms. The more positive information that a firm can provide, the better the outcome will be.
However, it is still anticipated that it may take a few years before the Pl market shows signs of improvement and starts on the road to recovery.
