A question of liability

The panel
Chair: Andrew Holt features editor, Insurance Times

Hugh Price Hugh James Solicitors

Roger Flaxman Flaxman Partners/Biba

Julian Brown Markel International

Charlie Wintour Towergate

Neville Miles First City

Richard Webb HCCD

David Sawyer QBE

Frank Maher Legal Risk

Mark Roddis Alexander Forbes Professions

Chair: How is the market adjusting to new liabilities?

Frank Maher: By effectively excluding cover through excesses.

We are seeing multiple excesses on the low level claims. We've seen it on the financial services side and we've seen it in endowments. We've also seen it with the changes in the aggregation wordings, following the LloydsTSB litigation, so the insurers are fairly effectively capping their liability.

I think the insurance industry's adapting very well. The proposal forms show it is foreseeing what's coming next.

Looking at the solicitor market, the new forms include a lot on financial services, endowments, in particular AVCs, and other pension-related liabilities. It's understandably covering its own back and the insureds have to recognise that their future's in their own hands.

Neville Miles: The market hasn't foreseen the likes of TAG and has been somewhat reactive, because it had to be.

Proposal forms now include questions to highlight the critical issues. Insurers can then make a decision whether or not to write the cover . With solicitors, you can't exclude that sort of cover, but you can decline to write it if you wish, or increase excesses, but this is not so easy.

Maher: TAG is interesting, because a number of the larger insurers saw trouble on the horizon through earlier proposals.

The TAG claims started coming in during December 2004, but at the October 2004 renewal some major insurers applied multiple excesses for the first time on personal injury related claims.

Until then the solicitors market, largely as a hangover from the Solicitors Indemnity Fund days, expected a cap of three or five times standard excess.

A number of major insurers didn't accept that on the renewals. They could see trouble, even if they weren't quite sure what it was.

Chair: What's your perspective, David?

David Sawyer: Somewhere between the two.

Crystal-ball gazing isn't necessarily a skill underwriters have.We tend to be reactive , and sometimes the horse has already bolted.

As for solicitors and the TAG situation, I think Frank is correct. You could foresee the tremors but how do you stop the avalanche?

You have to take a commercial view as to whether you're going to write it or not. You can risk select, but there is a limit in terms of what an underwriter can do.

Richard Webb: Hasn't TAG demonstrated one thing and that is the commoditisation of professional practices? Some 20 or 30 years ago these things just didn't exist.

Maher: I think commoditisation has become a huge risk in terms of aggregation because, if you get it wrong once, you've got it wrong many times.

Medium-sized firms have had it for some time, but it's even happening in the major corporate firms. These firms are finding their clients now expect more work for less fees.

They've recognised the same precedent documents being used time and again, so they want the same at a reduced price.

It's happened in other sectors, particularly financial services.

I also think you lose the client relationship. When you're dealing on a one-to-one basis with a client, you develop a relationship and claims are less likely. Mistakes happen without people expecting somebody to pay the price. Once you've got commoditisation, then you lose that relationship.

Sawyer: The way to stop that is by looking at best practice and risk management where procedures are commoditised.

On the solicitor side, we have a quality assurance model which sits behind the proposal and the underwriting, reinforcing and adding value to the underwriting decision.

Hugh Price: People have to recognise that it needs to be prevented.

The problem is they see a huge raft of work which can be done easily using technology. They set up templates and use technology but, at the same time, they don't recognise the need to put risk management in place to make sure they're doing it right.

Sawyer: Yes there is the protection of the consumer.

If you're wearing an underwriting insurer's hat, it's about risk selection. It's up to me as an underwriter to pick out the firms that are doing the work correctly and have the correct processes in place. We've been looking to move risk management into the insurance brokers sector.

Roger Flaxman: The first thing to consider is whether insurers want insureds to be risk managed or not ? I ask the question because the insureds are not sure.

If an insurer wants somebody to do something, he's got to incentivise him to do it.

One of the big issues with risk management is that it's not an easily definable thing. It will differ according to the kind and size of the organisation.

If you're going to ask somebody to do risk management, they must have a reason for doing it and they've got to get something back and some recognition when they've done it, and they've also got to know that what they're doing actually matters.

Going back to Frank's position, let's centre on the dynamic of managing risk to reduce risk, to make more underwriting profitable and close that gap.

Biba's objective is to identify with underwriters something that matters to them and the insured so they can meet in the middle and reduce risks to benefit both parties.

Maher: The real problem is that people in the marketplace, your average insured, expect that if they can tell you they've got risk management in place, they will get a discount. That works fine with motor insurance, where you can say the car's in the garage so you get 10% off. It doesn't work on a claims made basis, where the claims come in five, six years later, or even longer.

So from the insurer's perspective it's entirely understandable that they're not going to give a discount straight away.

Miles: My experience is that the core professions by and large have partnerships one way or another.

The majority of product-buyers tend to be partners of those practices and will take an interest in risk management - mainly because it is their own practice.

Insurers do vary in the way they respond to a risk management programme, and it's difficult to demonstrate that a particular well risk-managed firm has a better claims experience than those that might be lucky and have escaped a few.

For the small to medium-sized broker there's a huge additional cost to be compliant and put procedures in place that are genuinely going to reduce your exposure to liability claims.

The Magic Circle legal firms and big accountancy firms can devote time and training to ensure their staff is competent and are probably better risk-managed than the smaller outfits.

But the claims history wouldn't always suggest that.

Price: There are more big claims out in the market, but the level of smaller attritional claims by and large is down.

Although the large accountancy practices and the Magic Circle law firms may have had an increase in the number of big hit claims - which have been well publicised - the attritional claims, the low level ones, sub-excess, are definitely down.

Charlie Wintour: In the general market there is a tendency by many insureds not to notify small quantum claims. They fear that if they attach a list of minor matters, the insurer is going to turn around and say, 'Where on earth is the risk?'

As a broker you always notify insurers, without question, but not everybody follows brokers' advice.

Sawyer: But bear in mind that we're trading in a dynamic market which is highly competitive.

If QBE was to put its hand up and say, 'we will not write this risk unless it fulfils this certain criteria', then my guess is we would lose an awful lot of business.

Webb: We're now in a market cycle where you've got over-capacity and competition, and risk selection is fundamental in terms of us creating our offer.

We have our renewals, and the ones that are embracing risk management would be looked on more favourably than the ones that aren't when we come under competition.

It's very difficult to make a statement to say you are going to knock 'X' off the base price.

Julian Brown: Yes, but isn't that the sort of thing you'd develop over time?

Webb: Certainly with the renewal book, looking at one broker supporting the insurers that are doing that, looking to sell continuity, looking to embrace risk management.We can then say, 'over a period of time you are going to be better off from a premium perspective'.

Flaxman: Clients I speak to as individual adviser often ask me what they can do that is going to make a difference to the insurer.

One of the things that you underwriters would really value is the basic things of risk management.

Brown: I have a problem with the standard of risk presentation, not necessarily for your larger risks, but on medium-sized and smaller risks.

The proposal forms are often barely legible. They wouldn't present this level of work to their customers, so why should they think we get a good impression of them if they scrawl it out and don't tell us about their compliance handbooks, their code of conduct and information about their claims.

Flaxman: When you're seeing that scruffy bit of presentation, what does it tell you?

Brown: This is not a professional outfit which cares.

Webb: An underwriter uses the proposal form to paint a picture of the risk. If it's written up neatly, you interpret that as being a well-run risk.

Flaxman: When I look at a firm, the thing that matters to me most is how much care they are taking with what they do.

You can measure that by looking at the number of people, the number of jobs and the ratio of that and their fees.

I also ask firms to think about how they would demonstrate in a 15-minute meeting with an insurer or a claims man that they really take care.

What they're trying to do is form a partnership, isn't it, between them and the insureds. What the insured wants is to feel there's something coming back.

Because you don't meet the underwriter, a broker can sweep away that sentiment in five seconds.

If the client can get a cheaper price, he goes elsewhere. That's a terribly difficult dynamic to deal with when you want a partnership and you want them to take care. So you've got to create an incentive which bridges the intermediary gap.

Sawyer: Are you saying if they embrace risk management this will lead to a reduction in their professional indemnity premium?

Flaxman: No. I think that if you link doing risk management with a direct reduction in premium, it's just smoke and mirrors, I think it's false.

Miles: To begin with we were looking at a risk management product and the purchaser of product to get you a reduction in your premium. This hasn't really worked, and certainly doesn't work at the small level firms. What you require at the small firms is a set of questions that asks, 'are you taking care of your business? Are you involved in risk management from within?' We're not offering you a magic risk management product that will make your business better, that will cost £2000 and will give you a 20% saving on your premium.

Sawyer: I question whether or not the insurers are that worried about risk management because it is a numbers game.

Price: I think actually there's one fundamental change now in the legal profession, and that is 'no-win, no-fee', because suddenly the lawyers are actually taking a risk as to whether or not the claims succeed.

Price: The broker market is different to solicitors, particularly with FSA and TCF, because suddenly a new set of rules are coming in and of course we have the Law Commission looking at insurance.

Flaxman: Everyone at table has been affected by the change in regulations in the past 12 months and it's an ongoing process. We've got contract certainty now

Sawyer: There's a danger in that area that you're commoditising the product and therefore costs become the factor for you.

It actually does go back to the point that Roger was making that you are still looking for the 'care factor' in the insurer. You still want to see some evidence in the submission that they care about it.

Flaxman: What we've said is that a lot of PI is no longer a specialist product, it's a commodity product.

There are a lot of people in ordinary professions buying E&O or PI policies, probably because it is a requirement, who don't ever believe they're going to have a claim.

What I think is going to come out of the FSA regulations is that brokers will be expected to give more advice as to whether that is a good buy for the purposes and needs of the buyer.

This will change the dynamic of insurance broking and insurance sales quite remarkably, probably within the next three to five years.

Miles: I think you may be right Roger, although there is always an option, and I think the FSA is looking for this from a broker, to be very clear with your client about the service or the advice you will give.

This goes back to whether you've got a contract that outlines your service. We've got our ToBAs now which outline very clearly what our terms are.

In the past, brokers simply said, 'Here are the terms, take them or leave them'.

Insurers, well we might have done but there was no obligation for us to do so.

Flaxman: Neville, when you meet a new client, do you have a sheet of paper which asks how they want you to transact your business with them?

Miles: We give them our terms of business agreement.

Maher: I suspect the client will be more aware of the product he's buying if he's had experience of claims, because that's where the differentiators are.

Some of the work I've done in the past few years has been reviewing the claims done on behalf of insureds by insurers' own in-house teams and their solicitor panels.

Some clearly know what they're doing and others haven't got a clue.

Mark Roddis: It depends on which industry you're talking about.

Emerging industries such as IT and media, don't perhaps understand the concept of claims made. Quite a lot of IT people who purchase a PI product because of contract needs discover they've got to keep buying it for six to 10 years when they thought they were just going to buy it for one year.

A lot of those people go online and search for PI insurance. They get a quick quote without fully appreciating and understanding. Perhaps there should be something warning potential buyers that they should still seek advice.

Wintour: The concern at the small end is that you offer them a product and you offer them advice. The product cost can actually be cheaper than the cost of the advice, so they don't buy the advice.

They go online and spend £350 on a product because they need it for a contract. Or they go to a broker who says, 'I'll talk you through it, but the premium's going to be £700 because I need to take my brokerage in this'.

Maher: Your profession would best be served if commission was abolished. at the moment you have an entire profession whose business is predicated on the antithesis of what they're seeking to achieve. They're seeking to get best value, but the worse value they get, the better they get paid.

Price: Do you think brokers are aware of the increased duty of care that's now on them as a result of the FSA requirement to treat customers fairly?

Brown: I'm sure the majority of brokers are aware of all the issues.

Miles: It's one year into new regulation and both small and large brokers are still feeling their way.

Part of the reason for that is the FSA allows some flexibility in their rules and regulations.

To a large extent, treating customers fairly (TCF) is down to common sense. The FSA does not say that you must visit your client once a week or once a month.

Okay, we've got contract certainty coming in, but they will expect you to be offering what reasonable people would think is a good level of service.

Flaxman: There's a difference between compliance with the regulations and understanding what the regulations are implying.

And my point about TCF is it's not written down.

People want to be told, 'do this and you will be safe'. Bit it's a matter of judgment, not just ticking a box.

There's a possibility that when claims fail to be met properly, that lawyers will say, 'well let's have a look at the manner in which the demands and needs statement was taken and assessed'.

With hindsight you can say, 'but did you think of this? And did you ask them that?', and the client will say, 'well I certainly wasn't asked that question'.

The level of skill and knowledge of the broker is going to be differentiated from the intermediary who's only selling, if you like, one product or selling at the high volume low value part of the market.

This issue is becoming even more important.

So how do we interpret, for example, what is and what is not treating a customer fairly? And the answer is, time will tell.

But I think it's a very clever way of increasing the standards of intermediation without actually telling you what the rules are.

Maher: There is also the worry that things will be judged with hindsight and, when we have the next batch of alleged mis-selling claims, people will look back and say it should have been obvious

Price: This demonstrates how well the insurance market is adjusting to the concept of emerging liabilities such as mis-selling.

Who could have anticipated that 20 or 30 years ago?

This evolution is being driven by the FSA and to some extent by the government because the government wants to legislate.

They're trying to bring the insurance market into a framework that the government is satisfied with.

With endowment and pension mis-selling and so on, these are all signs that the industry is failing as far as the man on the street is concerned.

I think that custom and practice will change.

Price: But when you are Treating Customers Fairly, it's actually best practice.

The reality is if that you don't look after your customers, they'll go elsewhere.

Chair: Neville, what has been your experience of FSA visits and treating customers fairly?

Miles: In my experience working for a mid-size broker, they have to be taken very very seriously.

It's also been an enormous additional cost because we now have a compliance team, and a small organisation probably didn't have that before.

There's also reams of documentation which you have to disseminate to virtually every single person in the organisation to make sure they know what's going on.

Overall, we will be a better profession for it, as long as we can manage the process. It requires much more supervision right across the organisation.

Maher: Have you detected any benefits to your business because of it?

Miles: There is no doubt that we are operating in a smarter way than we were before.

We're picking up on mistakes much earlier than we would otherwise have done.

Brown: Hopefully, in a year's time when contract certainty will be a lot more rigorously adhered to, the insurance industry's image will improve immensely.

At the moment it's an embarrassment to the industry for a client to say, 'I spent £100,000 and it took six months to get a policy'.

Webb: We can turn around a document on the same day in the SME sector. But the bigger you get, the larger the risk, and that slows things down.

Roddis: A lot of wordings have been standardised in the past five years.

Miles: Wordings tend to be a little bit more bespoke by and large, and so they will not be off-the-shelf products.

They will probably have to be drafted by the broker and then agreed on through negotiations with the underwriter and the insured.

We all know when the day of renewal is, so we should start it six months beforehand rather than two months beforehand.

We have to get ourselves in the frame of mind of doing that, so that on that day we are all ready and we can send the policy.

It's a disgrace that the industry can't do it.

Flaxman: There is a large number of disputes with insurance brokers. Not always claims, but quite a lot of disputes.

Do you think there's a case for creating some kind of market dispute resolution procedure for insurance brokers' disputes and claims?

Miles: I'm sorry to say this, but it is largely produced by lawyers because of the process of going to court.

When something goes to a lawyer it has to go through a due process.

If you want to discuss it between an insurer and insured, you can do an awful lot with legal guidance without having to go through the process of litigation.

Flaxman: One of the important things is to try to reduce the impact of insurance-related disputes to the buyer market, to the customer market.

Brown: One of the huge problems is everything evolves around impressions and soon, rightly or wrongly, you're seen as either broker-friendly or you're underwriter-friendly and no-one's going to agree.

Flaxman: I don't see barriers like that, as barriers that are not insurmountable.

Just about everywhere in society where you have a panel or a court, someone will say, 'Mr Justice X or Y...No, not him'.

I'm afraid that's life, but it doesn't mean it's not a good idea to try to remove the bulk of the problem.

Brown: On the policy, it is either a valid claim or it's not a valid claim. Throw it out, or pay it.

This may be deemed as being a second chance for a broker to say, 'I know I'm in the wrong, but let's just try my luck'.

Flaxman: But it might be the underwriter who's got it wrong.I've just dealt with a claim where the underwriter has put something in the policy which doesn't work.

Brown: I used the broker as an example but it could have been the other way round, yes.

Flaxman: What we establish is that the client is always right, unless there's a good reason, such as if a client has been fraudulent or there's gross misrepresentation of the facts.

Price: It's difficult too to make a decision as to who's right and who's wrong, where the broker and the insurer or the underwriter wants to continue their business relationship.

If you were to have a sort of mediation protocol of some kind within the market, the people who act as mediators would understand the market.

Wintour: I think we need a bit more detail, but in principle I'd be happy to support that.

Roddis: I would support it, in principle, as well. Saving money and litigation has got to have its positives.

Sawyer: Where do I sign?

Maher: I think we need to set our sights realistically. We should start with a cap on the scheme to see how it works. If it works, then we increase the limit over the passage of time.

Chair: Who pays on FSA regulations? How might this affect any potential liability of brokers where there's been a regulatory breach of process or failure that results in loss or fine. Who pays?

Price: The PI underwriter will not pay any fine, but should pay costs to help defend against that investigation.

If it's just a negligence claim the underwriter will usually pay.

Wintour: An interesting number of directors' and officers' liability insurance don't have cover for regulatory investigations.

Brown: If you are an individual and the 'black sheep' - rightly or wrongly - you may not be protected by that policy. IT