ABS and ATE – Regulation and PII Insurance

Much has been written in recent months about the changes in how solicitor practices conduct business. The so called Tesco laws which allow non lawyers to own a solicitors practice came into force on the 3rd January 2012 and Alternative Business Structures (ABS) became a reality.
Ironically, despite five years of free advertising, Tesco’s have so far declined to take part in the party.

In fact there has been little interest so far in forming ABS’s – the Solicitors Regulatory Authority reported “more than 10 applications” had been received by close of play on the first day. With an ABS licence predicted to take up to nine months to secure, it seems unlikely that ABS will have an immediate impact on the legal market. However the scene is set for the corporate money to move in and this will inevitably be a game changer.

The Jackson reforms are the other wind of change that’s blowing through the legal services market. The Government seems set on banning payment and receipt of referral fees by solicitors and insurers by amending the Legal Aid, Sentencing and Punishment of Offenders Bill. Legal firms who rely on referral sources to generate their case load need to start planning now or these reforms will seriously affect the flow of business. Referral agents and After the Event Insurers (ATE) will also considering their future.

Inevitably the interested parties will find a work around whereby work and money continues to flow to legal firms, referral agents and insurers. This might result in the formation of ABS companies where the business owners are drawn from the three affected business sectors and possibly incorporating financial advisors to mop up commission due on investments that are made on larger compensation or court of protection settlements.

Whatever the reason for setting up an ABS, the parties need to be aware that of how the new ABS’s will be regulated in respect of the sales of general insurance and investment business. Currently any legal firm that undertakes this work or derives income from the sales of these products is covered from a regulatory point of view by the Law Society. However the Law Society has said that they will not be responsible for these companies and therefore any ABS which wishes to profit from this type of income will need to seek authorisation from the FSA. (click here to view FSA Policy Statement) An application to the FSA for authorisation will further complicate and prolong the time that it takes for an ABS to be in a position to begin trading.

From a professional indemnity insurance point of view the ABS will still need to buy cover from the approved SRA insurers, however it will be important to ensure that the policy also covers professional indemnity risks arising from the fees generated by any work that is regulated by the Financial Services Authority.

Alternative Business Structure who need advice on Professional Indemnity Insurance can call PI Expert for help and advice. PI Expert specialises in Professional Indemnity for ABS firms and Solicitor practices.

Professional Indemnity Insurers Brace for Downgrade Impact

The news that the Ratings Agency Standard and Poor is considering downgrading the credit rating of a number of European Insurers will strike fear into the heart of the Insurance Industry in the UK and the Professional Indemnity Insurers that underwrite General Brokers and Independent Financial Advisor’s.

The underwriters under threat of a ratings down grade include household names such as Aviva, Allianz, Axa and Generali. RSA Ireland is also on the credit watch list. If the downgrade goes ahead they will join the recently downgraded Groupama, a well regarded medium sized insurer who has already seen their credit rating downgraded as a result of their exposure to Government securities.

The problem facing insurers is that to maintain their credit ratings, they have placed their funds in what has traditionally been considered as safe investments. The current economic crisis has changed the face of safe investments – investments in financial institutions, banks and government securities have been undermined, maybe irretrievably. Reinforcing this view, Standard and Poor have stated that the review of the insurers ratings will be based on their review of the Eurozone member governments.

It follows that if there is a downgrade in the credit rating of the government underwriting the securities then the insurers investing in them will also suffer a downgrade in their credit rating. S&P have stated that the rating review could see some insurers long term ratings lowered by as much as two notches.

The effect of Government Debt on the profitability of insurers is illustrated very well by the recent results published by Allianz. In November this year the firm announced a fall in third quarter profits of 80%, largely due to losses on Greek debt. To put this in perspective the German Insurer made profits of just 258m euros in the three month period, down from 1.27bn a year ago.

The Greek debt is the tip of the Iceberg, and exposure to Government debt in Italy, Spain and Portugal has yet to really play a part in insurers results. If S&P carry out their threat to down grade Germany, the Netherlands, Finland, Luxembourg and Austria by one notch and France by two, this will have a significant effect on insurers and could put pressure on solvency margins, leading to possible insurer failures.

For Insurance brokers and IFA’s these potential downgrades are significant cause for concern. The British Insurance Brokers Association recommends that members place cover where possible with A Rated insurers. As a rule of thumb to recommend an unrated insurer or one with a lower rating must be justifiable if a professional indemnity claim is to be avoided. Circumstances where this might be appropriate would include risks where no alternative insurer is available for example some solicitors Professional Indemnity or Surveyors PI cases or those where the only affordable insurance cover is unrated or low rated.

The fifteen firms affected by the S&P credit watch negative ratings warning involves some heavy hitters within the Insurance Industry and will make recommending insurance cover more challenging over the coming months. Brokers will have to consider how the Euro crisis could affect the rating of insurers over the period of the policy. Now, more than ever, it will be important for brokers to document the consideration that they have given to the financial security aspect of an insurer when making their recommendation – a factor which many brokers would not have even thought to question with the likes of Axa, Aviva or Allianz in the past.

IFA’s will need to be extra careful too- some of the insurers affected have a big exposure on the UK Life and pensions side as well as on the general market – Aviva, AXA and Generali are all major providers of Life Investment and Pension products to UK consumers.

Many Professional Indemnity Insurers look to see each year what the exposure is to unrated and lower rated providers as a rating factor when setting premiums. A broker or IFA who has made sensibly based recommendations during the year to what appeared to be strong financial institutions, could find that as a result of an insurer down grade, unforeseeable even three months ago, they have a portfolio of higher risk policies. This will affect Professional Indemnity Premiums.

The decisions take this weekend by the Eurozone leaders may well be a step in the right direction to strengthening the Euro and thus avoiding a crisis, however the will to push this through will need to be considerable and PI Expert is not convinced that this exists in either the politicians or the populations of the member states in the Eurozone.

For incisive help, advice and quotations on Professional Indemnity Insurance for Insurance Brokers and Independent Financial Advisors please call PI Expert on 01825 745 410

PI Insurance – Falling Ratings Cause Concern

The current economic gloom creates an interesting environment for insurers. It is unusual for UK insurers to fail and this is largely due to the solvency margins that have been enforced by Government and the FSA over a period of years. This means that the UK is very safe place for people to insure their business and property.

One of the problems that the industry will face over the coming months will however be one of stability. The investments that insurers have used to maintain solvency levels have traditionally been regarded as very safe vehicles. However as he financial crisis has begun to bite one of the interesting features has been that these traditional safe investments have come under attack and this is having an effect on how they are rated by rating agencies.

Evidence of an insurer’s financial rating is key components that brokers should use in assessing and recommending cover. An insurance broker has a duty of care to their clients in selecting and recommending an insurer. In most cases brokers will look for what an insurer who has an A credit rating.

In recent times there has been an abundance of such companies to choose from, however if the current package of measures that have been put forward to save the Euro are unsuccessful, then a situation could arise whereby the gold plated A rating becomes much more elusive and exclusive. This could present an issue for brokers as the absence of a credit rating could leave them vulnerable to allegations of a breach of duty of care.

Like most brokers PI Expert has a policy wherever possible of recommending A Rated insurers. This is an essential not just for our client’s peace of mind and the professionalism that we bring to the deal, but also for our own Professional Indemnity cover.

Increasingly Professional indemnity Insurers who cover general insurance brokers are asking about the security of the markets used when granting cover and this is something that brokers will need to bear in mind over the coming months and years as the marketplace becomes more turbulent.

FSA Proposes PII Public Policy Disaster

In their response to the Joint Committee on the draft Financial Services Bill the Financial Services Authority (FSA) used the justification of “Public Policy” to call for changes to the law to remove the direct link that exists in law between causation and compensation.

PI Expert believes that this argument is fatally flawed. It is our view that altering the laws of natural justice in the way suggested by the FSA will directly result in the public being less well protected than as is the case under the current regime. To suggest otherwise implies a failure on the part of the regulator to understand the very mechanisms that are in place to protect customers.

The effect of the FSA’s proposals will result in advisors being required to compensate not only for the affects of inappropriate or bad advice, but also in cases where the advice that they have given is correct, but during the course of the advice being given an FSA rule, however minor, has been broken. This might include for example failure to record the issue of a key facts document or Initial Disclosure Document.

The net result will be an increase in the amount of compensation paid, and when claims farmers get wind of a no fault compensation scheme, a steep increase in the level of spurious claims.

Of course it is not the Advisor who pays these claims, but their Professional Indemnity (PI) insurers. The bottom line therefore is that it is the PI insurance cover, not the rules and regulations put in place by the regulator, which underpins and provides financial security to consumers

The PII market for Advisors is currently in a good position. General brokers are not seen as a high risk and pay relatively low premiums. Mortgage Advisors saw some upward pressure on premiums during the early days of the economic crisis, but largely this situation has now stabilised. IFAS’s have experienced issues arising out of pensions, endowments and market specifics such as Key Data and similar market issues, although rated more highly than other types of advisors, are still able to buy PII cover at relatively reasonable premiums.

There is a good range of well resourced, reputable, A rated insurers who are prepared to underwrite the advisors PI market. This is a significant benefit to the consumer and, indirectly, to the Financial Services Compensation Service.

Rating of PII is largely controlled by the level of claims. Advisors who regularly give bad advice receive more claims than those who provide good advice. Advisors with poor claims histories pay higher premiums or struggle to find insurers prepared to cover them. As evidence of PII cover is a requirement for continued authorisation this rating process forms a natural barrier to trade for advisors that give poor advice and in itself provides a method by which the industry silently polices and removes bad firms.

The proposals made by the FSA would have the effect of removing this self regulation process.
The moment that the law requires firms to pay 100% compensation when they have not caused or contributed to a loss the differentiation in PII claims patterns between good and bad firms will be lost. If claims go up then premiums go up. If claims go up exponentially, and underwriters can’t make a profit, then insurers will start withdrawing from the market. And if Insurers withdraw from the market or advisor can no longer afford to pay premiums then the mechanism that protects customers (PII) is fatally undermined.

This is a scenario which has already played out across two other professional sectors – Solicitors and, to a lesser extent, Surveyors. For both of these sectors there is a limited and decreasing market of A rated insurers who are prepared to underwrite to the stringent requirements of the regulatory body.

The Solicitors PII market provides an unpleasant vision of how the insurance advisors PII market could look if the FSA proposals on causation and compensation are accepted. Over the years the number of insurers prepared to underwrite solicitors business has dwindled to just 19. Premiums have sky rocketed.

There are still A rated insurers on the SRA approved list, including Allianz, Liberty and Travellers, however many of the A raters are refusing new business or have priced themselves out of the market for existing clients. Chartis, who were the largest solicitors PI insurer in 2010, withdrew from writing new business for Solicitors PII in 2011 and actively worked to reduce their exposure for existing policyholders. The emerging theme in the solicitors PI market has been the entrance of a number of foreign unrated insurers – Alpha (Denmark), European Risk Insurance Company (Iceland) and Enterprise (Gibraltar).

The Solicitors Regulation Authority states clearly that it does not regulate, vet or approve insurers on the list. The SRA famously gave Quinn access to market shortly before the company suffered a solvency crisis. To be fair to all concerned at the point of authorisation Quinn did carry a credit rating, but it fell short of the gold plated A that most brokers look for when placing business.

Evidence of an insurer’s financial rating is key component in placing cover. The financial security offered by unrated foreign insurers may be better than some of the UK markets, however in the wake of the Quinn fallout Steve White, Head of compliance and training at the British Insurance Brokers’ Association commented in an interview with Insurance Age

“Brokers have a duty of obligation and care. While the broker is not the guarantor of the insurer, the law does expect the broker to exercise due care in selecting an insurer and brokers should be mindful of that when making their selection. One of the factors that a broker can take into consideration is the credit rating. Though there may be other considerations, the absence of a credit rating could leave a broker vulnerable to allegations of a breach of duty of care.”

If the Insurance Advisors PII market followed the same course as the Solicitors PII market, as well it might if the FSA’s request is enacted into law, the industry could well see a deterioration in the financial rating of its own insurance carriers. This would be a disaster for the industry as a whole and for consumers in particular.

PI Expert hopes that the regulator will reconsider this ill conceived suggestion. For our part Brokers and Advisors must make our voice heard in this important debate.

PI Expert – Independent, Authoritative, Incisive Professional Indemnity Advice for the Financial Industry For help and advice call us on 01825 745410. www.facebook.com/PIExpert

Professional Indemnity Insurance – is the minimum right?

PI Expert is often asked by clients for information on the level of Professional Indemnity Insurance (PII) cover that they should buy. Typically this will be asked by businesses that do not have an industry body that lays down a minimum requirement for cover.

For professions that have a regulatory body such as Solicitors, Accountants, Surveyors, Insurance Brokers, IFA’s and Mortgage Advisors there is a set minimum laid down which should be used as a base from which to work when calculating the firms potential exposure to claims. PI Expert wants to encourage these firms to think twice about the limit of cover they really require.

It is vital to put a great deal of thought into your firms PI insurance limits and while on some occasions the minimum cover required by a regulatory body is the right level of cover for a firm, this is frequently not the case. In fact relying on the minimum level of cover as a basis for buying protection is a dangerous attitude to adopt.

Take for example General Insurance Brokers. The FSA lay down a minimum requirement for Professional Indemnity Insurance which at the time of writing is €1,120,200 for a single claim and €1,680,300 in aggregate. An incorrectly insured factory building that is destroyed by fire could wipe out the minimum FSA PII sum insured on defence costs alone!

Similarly if a business interruption sum insured for increased cost of working is forecast incorrectly, a PII claim of many millions of pounds can result. Such claims would probably be enough to take most small to medium sized brokers out of business, as well as their clients.

Lawyers, particularly those practising in the conveyancing field, or Surveyors who carry out Mortgage Valuations or Portfolio valuations can also fall into this trap. The Professional Indemnity market for both of these professions is particularly difficult at this time, so obtaining increased limits can be costly.

Accountants also fall in to this category; for example the minimum PI requirement laid down by Institute of Chartered Accountants of England and Wales (ICEAW) is two and a half times fee income. What accountancy forms should be considering is not what the minimum level that is required, but what the financial impact would be of providing incorrect advice to a larger client in respect of their VAT liability or corporation tax?

If these calculations were wrong would a claim against the firm wipe out the PII Limit? If so, remember that with sole trader and partnerships it is the individual not the firm that bears the ultimate cost, even to the loss of their own assets or the shirt off their back to quote a famous maxim.

So regardless of whether an individual or firm has an industry body that sets a minimum cover limit the cover limit for PII cover, it is essential to ensure whether that limit is adequate. The cost of buying higher levels of cover is often less expensive than firms expect as PII premium costs do not increase in direct proportion to chosen and, in the event of a claim, buying the correct level of cover will make the difference to the insured firms survival.

PI Expert offer specialist help and advice to all types of professions for their Professional Indemnity Insurance (PII) cover. Call 01825 745 410 for a quotation.