It is important to note that wills are likely to move up the risk ranking due to an increased volume of claims emanating from this area of practice.
The next stage of the process would be for the actuaries to factor in their desired minimum premium. A minimum premium is what an insurer is willing (or allowed) to deploy their companies capital. This helps to ensure that they have the appropriate reserves and resources in place in the event of claims materialising.
The factors that will influence the actuaries’ rates will include:
- Areas of practice undertaken
- Gross Fees (they may apply size discounts due to economies of scale)
- Claims experience
- Circumstances notified
- Self-insured retention (the policy excess that you are willing to bear)
Whilst the greatest impact on the actuaries proposed pricing would be, their claims and notification experience there may also be an element of forecast and prediction influenced by the following factors:
From the actuaries work this will provide the general appetite of the insurer, which could be defined by:
- Size of firm (normally determined in Partner/ Director size segments, however on occasion based upon fee income bandings)
- Profile of firm – to include the work undertaken or specifically how much of certain areas of work are undertaken
Once the actuaries have provided the underwriting team with their pricing mechanisms, often delivered through an underwriting or pricing platform. The underwriter will then look to undertake their own risk assessment based upon the individual characteristics of a practice.
Underwriters Risk Assessment:
There are four key considerations; we refer to as ‘hard factors’, when an underwriter undertakes their risk assessment:
Underwriters will review the work disciplines undertaken and how much of this work is undertaken. They will look at the percentages of each category of work, which are filtered into ‘low, medium and high’ risk categories following the work of actuaries.
Underwriters will look at who you are undertaking the work for. The reason for this is that not all of your clients will be considered as identical in their risk profile by the underwriter, despite the work undertaken being classified the same. If you have a particular niche or area of expertise specialism, underwriters may take a further interest in this.
Acting for Ultra High Network clients may be perceived a greater risk than acting for the general public.
Acting for a PLC’s would be a greater perceived risk when compared to a firm that is acting on for SMEs.
Naturally previous claims experience will have an impact on the proposed terms. Insurers will consider the following factors:
- Severity and/or frequency of claims experienced
- Frequency and volume of notifications experienced
- Types of error experienced was this a failure of process, repeated similar errors or a unique claim with unfortunate circumstances.
- Are claims outside of the declared client profile? Have these resulted from legacy issues; if so have these issues been ring-fenced? Or has sufficient time elapsed to enable the underwriter to ignore them?
- They will also consider if you have had any issues with the regulator
All of these factors are linked to how your practice implements risk management and the steps you have taken to prevent a similar situation happening again. If this was a ‘one-off’ occurrence, demonstrate this to the underwriter.
New claims experienced by insurers can alter rates and quite often create new question sets for practices to answer. After the most recent recession we had new questions about subprime mortgages, and more recently, additional questions have been related to investment schemes along with escalating ground rents.
This is the last key consideration an underwriter will look at, and arguably the most important. They will look at the specific procedures adopted within your practice, which could include:
- Who is responsible for risk management within the firm?
- Is there a clear risk management plan in place?
This may include:
- Does the firm have a clear policy on what work it will, and will not do?
- What case management system is utilised and is this used across the practice or just in specific areas
- What is the supervision and systems of control in place for specific areas of practice
- Has the firm made investment in its IT resources, technology and Cyber Security
Does the firm seek to assess the client’s experience after providing a service?
Other factors that an underwriter could consider when evaluating a practice may include:
- Staff and partner numbers:
- Staff to partner ratio. This could include qualified staff to non-qualified to ensure that there is sufficient supervision in place
- Fee income:
- Does this fee income support the staff numbers or is there the appropriate number of staff to handle the volume of work undertaken by a practice
- Age of firm to include:
- Experience of your staff
- Your areas of practice along with change – have you been undertaking a similar profile of work for a period of time?
- Succession planning
- Is the firm striving to stay relevant in their market, investing in the business or is it in decline – is there a new energy? With new ideas being generated from the management team
- Prior practices and their claims experience:
- Reasons for any recent mergers/acquisitions
- They may also request details on what due diligence was undertaken prior to assuming their past liabilities
- Any significant forthcoming changes to the business