Accountancy PI - PI warfare

Since the involvement of accountancy giant Andersen in the Enron scandal in March 2002, professional indemnity insurance for accountants has become highly competitive. The Institute of Chartered Accountants of England and Wales estimates that there are between 10,000 and 12,000 chartered accountancy practices in the UK, with around 95% of them being one or two-partner local firms, which offers huge opportunities for many brokers.

"The Enron scandal has been one of the overriding issues for accountants in the last 10 years," claims Ben Carter, senior underwriter at QBE: "The number of professional bodies that have been set up since is unprecedented." All practicing accountants registered with UK accountancy bodies are now required to have professional indemnity insurance.

Directives

New regulations are still emerging in reaction to the measures put in place by the professional bodies. The most significant legislation in the last few years has been The Companies Act (2006), one of the larget single pieces of legislation in parliamentary history. Since April, the Act has placed a cap on liability for auditors, this after a number of court cases found that auditors could have had a care of duty towards clients in relation to accounts discrepancies.

The effect of the Act on insurers has yet to be seen: "There is some distance to be run before we see the impact of capping auditors, as it has yet to be tested in court," highlights Carter, yet the Act is likely to reduce some of the pressure by limiting claims sizes.

"Accountants struggle to keep up with regulatory demand," Carter reflects. This difficulty creates opportunities for knowledgeable brokers as accountants look to experts to ensure full cover.

Currently, professional bodies demand minimum professional indemnity insurance to cover civil liability arising from a business' conduct and losses sustained as a result of dishonest or fraudulent members of staff. The monetary minimum levels of indemnity are proportionate to the practice's size.

However, most accountancy firms require wider cover than that offered by professional indemnity insurance alone.

"A lot of accountants see their insurance as a mandatory piece of paper, unless they can be shown the value of what is being sold to them," notes Carter. Therefore, it is important to tie-in other products to create a comprehensive insurance package to demonstrate a product's true worth.

Common covers include buildings and contents, employer's liability and cover for costs incurred to restore damaged documents. Axa estimates that one in 20 of its accountancy clients make a claim each year, with the most common causes being theft or accidental damage. Directors' and officers' cover is also popular, with RSA including it as standard in its errors and omissions cover. "The main differentiation between insurers is which offers broader cover," notes Andrew Fryer, director of Finex at Willis. "Some insurers just offer base-level options, while others have a number of potential add-ons available."

Excess

For a general accountancy practice, excesses sit on an average of around 2%, however, they can vary wildly depending on the size of practice. "Larger players absorb a lot of the risks themselves, taking larger excesses to keep their premiums down," explains Carter. Currently, maximum excesses are resting at £30,000 for each partner at a firm.

Rates are also very competitive. Carter notes: "A lot of insurers have come into the industry in the last few years seeing it as quick win, though rates are the lowest they have been since the late 1990s." Historically, accountants are one of the first professions to see rate reductions because their cover is sometimes perceived as relatively straightforward to underwrite.

As befits their jobs, accountants are price sensitive: "Accountants will move for as little as a £5 saving," claims Rob Ward, managing director at broker Sennet Professional Indemnity. Therefore, with so much competition, insurers are driving rates down in order to retain business. Fryer remarks: "Accountants see the base terms set out by the ICAEW as broad enough, therefore price and claims advice are the most important factors for them."

More specialised practices with higher risks can have much higher premiums, although Daniel Mitchell, financial risks underwriter at Brit Insurance, notes that these premiums are still competitive: "For specialist practices such as mergers and acquisitions, premiums may be slightly higher, though not astronomically so."

Many in the industry agree that, while there are so many insurers in the fold, rates are unlikely to rise. "It would take a seismic shift for significant increases in premium to be imposed," highlights Ward. "This is because the wording is set down by the professional bodies. No insurer can reduce coverage and remain approved, therefore it would be unable to offer terms for a qualifying policy."

In private, some insurers admit that there is the chance of some players dropping out in the foreseeable future, which could lead to rate hardening. Quinn was withdrawn from the approved list of Royal Institute of Chartered Surveyors insurers for professional indemnity on 31 July after having withdrawn from Moody's - this despite a listing with the credit ratings agency being one of the RICS' minimum criteria.

Quinn's decision is already causing ripples through the professional indemnity market, with a spokesperson from the Solicitors' Regulation Authority indicating that it may also drop Quinn. However, Quinn said that it would continue to offer PI products and that its plans had not changed in this area.

Conditions

There are plenty of opportunities for brokers in this competitive market, with commissions set high at an approximate 20% average, rising to 25% for professional indemnity specialists. "The market is very open," claims David Brownjohn, commercial pricing manager at Axa. "All brokers will know some local accountants, either as clients or mutual introducers of business to one another."

Over the last few years, there has been a shift in favour of the regional broker. Carter reminisces: "As recently as five to 10 years ago, London was the hub focused on the Lloyd's markets. Now, smaller and regional brokers are developing relationships with insurers, making it very accessible, especially with the advent of e-trading." Accountants are currently the second largest profession making enquiries on the web to RSA, both direct and through a broker: "A lot of people see the accountants market as very traditional but it is changing rapidly. For example, with more accountants working from home, they are looking to get one-stop-shop packages on the web as well as through traditional broking routes," highlights Aaron Devitt, director of professional and financial lines at RSA.

A recent report from the Chartered Institute of Management Accountants shows that the roles of finance and accounts professionals are transforming. "Many accountants not trained in business may find themselves challenged to fill the broader decision support role now expected of them," notes Peter Simons, innovation and development specialist at CIMA. However, Fryer claims that this has not yet had an impact on the insurance market: "Insurers are waiting to see what the rewards will be before adding clauses or increasing premiums." Therefore, while these broader roles may lead to a spike in claims, it is yet to be seen how much of an effect that they will have on the market.

Warning

As finance professionals, another concern for accountants is the credit crunch, though its full consequences remain to be seen. "As the economic climate evolves, an increase in claims intimated against accountants is anticipated as client expectations with regards to investments are not met," warns Neil Gunn, technical underwriter at Norwich Union.

However, it is not all doom and gloom for accountants. According to Grant Thornton, 938 companies were placed in administration between April and June this year, a 15% increase on the same period in 2007. Insolvency practitioners are experiencing huge growth, with many insurers targeting them as a result. Yet, it is important to consider the risks of insolvency practitioners, highlights Carter. He warns: "Administrators are looking for someone to blame; throw mud hard enough and it could stick."

Despite the challenges to be met in the future, Devitt is upbeat: "The accountancy market is a (generally) very profitable one," he notes. "It is generally stable from a claims perspective, leading to a consistently competitive ratings environment. This sector is not as closely affected by the economic downturn as surveyors or solicitors have been."

ACCA requirements

The current guidelines from the Association of Chartered Certified Accountants have three levels of indemnity requirements. For a practice with a total income of less than £200,000, the minimum level of cover required is two-and-a-half times its total income plus 25 times its largest fee, with £50,000 added to that final figure. For practices with a total income of between £200,000 and £700,000, the minimum level of cover required is £300,000 plus their income and 25 times their largest fees. The largest practices, with over £700,000 income, are required to have at least £1m cover, plus the value of their largest fees.

Case studies

Andersen and Enron - In March 2002, Andersen, one of the big-five accountants, was caught shredding documents during the demise of Enron. Andersen was found to lack integrity and the resulting legal case led to the collapse of the company, causing market-wide regulatory tidal waves. Two milestone legal cases preceded the Enron ruling, which led to the opening of the professional indemnity floodgates, helping to test the water and shape The Companies Act (2006) to limit the liability of auditors.

Caparo Industries PLC v Dickman and Others (House of Lords ruling - 1990) - The house ruled that a care of duty was owed to shareholders and members of a company but that an auditor has no duty of care to potential purchasers of shares.

ADT v BDO Binder Hamlin (1996) - BDO Binder Hamlin was found liable when shares in Brittania turned out to be worth less than the price paid by ADT based on the figures of the accounts. A BDO partner confirmed that he "stood by" audited accounts of Brittania Security when called into a meeting with ADT. BDO was ordered to pay the £65m difference between the price ADT paid for Britannia and what would have been paid if the accounts showed the true position of the company.

The Companies Act (2006) - Active from April 2008, the Act limits the amount of liability owed to a company by its auditor to a "fair and reasonable" proportion of work in respect of any negligence, default, breach of duty or breach of trust occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company.

What is a chartered accountant?

Contrary to common perceptions, chartered accountants do more than look after the finances of businesses. According to the Institute of Chartered Accountants in England and Wales, chartered accountants give professional advice to organisations on a wide range of business and finance issues.

A chartered accountant assumes the role of a business adviser, making high-level strategic decisions that aim to improve profitability and increase market share for their clients' or their employer's businesses.

In order to become a chartered accountant, you need to become a member of one of the professional bodies. To become a member of one of these bodies, you need to complete a training contract.

A training contract requires you to complete around 450 days' technical work experience with an employer and several exams as set by the professional body. Training will last a minimum of three years but can extend to five, depending on your chosen entry route and your employer's preferences for training.

For more information on professional bodies in accounting, visit:

- Institute of Chartered Accountants in England and Wales - icaew.co.uk

- Institute of Chartered Accountants of Scotland - icas.org.uk

- Institute of Chartered Accountants in Ireland - icai.ie

- Association of Chartered Certified Accountants - accaglobal.com

- Chartered Institute of Management Accountants - cimaglobal.com.