Insurers' methods of fixing professional indemnity premiums do not take account of risk management strategies. Frank Maher sets out a case for doing so
PROFESSIONALS WHO THOUGHT risk management meant buying an insurance policy will be in for a nasty shock when their professional indemnity (PI) cover comes up for renewal. Premium are rising and there are fewer insurers to choose from.
Some firms are ahead of the game, however, and are starting to take advice from professionals who understand their claims profile as well as the wider strategic issues, which affect the running of their businesses.
American computerised risk analysis techniques can help firms create sophisticated models. These can determine the level of risk clients are comfortable with retaining, enabling them to save on premiums at the lower end.
Problems of the past
One firm spent four times as much on deleting its excess over the years as it would have cost to pay the claims. That firm will now be going forward with a large excess coupled with a captive solution. New risk management procedures will give it a real chance of bucking the odds and making overall savings.
PI insurers have traditionally taken the view that they are insuring the problems of the past and risk management would only help avoid future problems. As a result they will not discount premiums for firms who demonstrate good risk management practice.
Although their approach has in the past been supported by statistics, in the majority of cases this is not the complete picture. More can be done.
First, there are the claims where the alleged acts occur during the period of indemnity. Although fairly small in number, they include some of the more expensive ones because urgent procedural matters inevitably mean more legal costs.
Second, there are many practical steps firms can take to reduce their exposure for past acts and omissions. We only have to look at Enron to see how post-incident conduct can alter the course of history.
Perhaps Andersen would face a more certain future if the shredding had not taken place - although large claims are a hazard of life for all global accountancy firms and they have always resolved them in the past.
Examples of risk management strategies that can help manage the past include a firm's complaints handling procedures, early notifications to insurers and avoiding the creation of documents that may have to be disclosed.
They should also follow best practice on discovering a problem. For example, they should check whether the problem is isolated or, if there is a risk, if can affect other areas. Other techniques for managing risk include the use of computerised management data and predicting likely areas of exposure for future losses.
PI is already the third largest overhead for most firms and it's clear there is plenty they can be doing to save money.
Even if insurers won't discount the premium, professionals need to be aware that those firms who have confidence in themselves, and invest in their systems should be able to start taking control of their costs.
Frank Maher is head of professional indemnity at Weightmans.