RSS feedsBuying professional indemnity cover has never been easier for accountants. With the horrors of Enron and WorldCom a distant memory, the risks of IFRS implementation out of the way and the taxman promising to adopt a more moderate approach, the risks facing accountants have reduced dramatically.
The market has responded accordingly. During the past 18 months, the cost of cover has softened dramatically, with rates falling by as much as one fifth. Accountants who used to spend close to 3% of their revenues on professional indemnity are now spending half that amount.
With risk low and the market soft, new players have rushed in to provide professional indemnity cover, creating a competitive industry. This range of choice and low costs mean that, for the first time in many years, accountants have the opportunity to tailor their cover to their exact needs, as opposed to taking out a generic off-the-shelf policy.
Accountants thinking of tailoring their professional indemnity to specific risks should ask themselves the following questions:
1. Why should our firm look for tailored cover?
According to Keith Tracey, leader of the accounting practice at insurers Marsh, a firm should only tailor cover if it is of substantial size or has significant business exposure outside the UK.
'The cover available in the standard professional indemnity policy for a UK-only accounting firm is very broad. Insurers understand what accountants do and what their liabilities are and there is a long business history and a strong body of case law. This contrasts with consulting or IT, so insurers are happy to provide broad cover,' says Tracey.
He advises that, in most cases, smaller UK firms and sole practitioners have little to gain from straying from the standard policy because cover on offer is so broad and comprehensive.
For larger firms with multinational clients and international exposure, how ever, the picture is very different. 'Large firms have multinational companies as clients and face different regulatory problems in each of the territories they operate in. This requires cover where the policy wording is extended and adapted to address these risks,' says Simon Brookes, an executive director at Heath Lambert.
Unlike smaller firms, large practices should structure their policies differently and favour an adapted policy that has evolved from the standard offering. Large firms should also consider managing their risk by balancing the cover offered through professional indemnity policies with the use of captives.
Captives are large pools of money held offshore as reserves to be used in the event of litigation. Captives provide firms with the opportunity to manage some of their cover internally and allow them to diversify their cover.
2. When should a small firm consider tailored cover?
Although most UK-based firms of an average size are probably covered by a generic policy, there are times when a small firm should consider taking out more specific insurance.
'If a firm has some business exposure to, say, the US or Canada, then the standard policy available in the UK will not cover this activity. In these cases, it is essential for a firm to tailor its cover,' says Tracey.
Smaller firms should also consider tailored cover if they undertake any consultancy work or have directors or partners who act as non-executives of other businesses. 'If a firm is involved in any business that does not fit specifically within the accounting remit then it should make its insurer aware of this and adapt cover accordingly,' says Tracey.
3. Does tailored cover cost more for a firm?
If a firm does need to specialise cover, there are cost implications. 'Tailoring professional indemnity is exactly the same as tailoring insurance for your home. It depends what you want. If you need to insure a Leonardo Da Vinci painting in your home, you will pay more. If you need cover for business in an unfamiliar area, you will pay more,' says Brookes.
4. When should we approach agents for specialised cover?
If a firm does need specialist cover, now is the time to take some out. With rates low and competition for custom high, there are opportunities to take out specialised cover at a lower cost than normal.
'In a soft market, the scope is there to add on extra cover and tailor a policy with minimal cost impact. If and when the market hardens it will be much harder to do this,' says Brookes.
