With insurers increasingly averse to risk, accounting firms are having to pick up the tab.
By Tony Kaye
The fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has already sent shockwaves through the financial sector and translated into a massive jump in the cost of insurance for many accounting practitioners, financial advisers and other industry specialists.
Murray Wyatt FCPA, chairman of Melbourne-based accounting and financial advisory practice Morrows, was shocked when he received his firm’s latest professional indemnity (PI) insurance policy renewal statement. The firm’s insurer had increased its premium 25 per cent over the previous year, adding tens of thousands of dollars.
“We’ve never had a claim, our business model hasn’t changed, and we’re not involved in anything associated with the royal commission ,” Wyatt says.
“What’s happened is that the [risk] appetite for insurance companies has diminished and with the royal commission, the pricing of risk relative to appetite has resulted in significant increases in PI insurance across the board.
“The question is whether insurance companies are actually repricing the risk associated with each of our operating businesses, or whether it’s just a blanket concern about what might come out of the royal commission.”
It could be a combination of both. With a surge in legal actions against banks, other financial institutions and even individuals, there is a promise of swifter prosecution from regulators such as the Australian Securities and Investments Commission and Australian Prudential Regulation Authority.
Add to that a rise in surveillance by the Australian Taxation Office (ATO) to identify and prosecute tax offenders, and it’s little wonder the insurance industry’s risk barometer for the Australian financial services sector has increased from moderate to extreme.
CPA Australia public practice manager, Keddie Waller, says with fewer underwriters willing to accept the growing risk in the sector, the impost on practices is rising in an environment where many members feel they cannot increase their own pricing to clients.
“The concern we have is that our members are going to be impacted, and we have a lot of practitioners in the small-to-medium sector,” Waller says.
“There is a very high likelihood that their PI is going to increase, and that’s going to have an impact on their bottom line. It’s also going to have an effect on their risk management framework.”
Together with other rising compliance costs, Waller says some practitioners are at a crossroads in how to position their businesses for the future.
Importance of risk mitigation
Wyatt says the most important step for accounting practitioners is to be able to provide the professional indemnity insurer with a very detailed roadmap of the type of business they operate and its exposure to risk.
“It’s all about giving the insurance company and underwriter enough information to get comfortable with the risk associated with your business,” he says.
“That’s your systems, processes, checks, compliance regime, manuals, protocols and [everything] which gives them comfort there are checks and balances in your organisation to cover off on the advice that’s given.”
Waller agrees it’s vital all practitioners mitigate and control their risks as best as practically possible.
“We always advise our members to have good processes, good document control and risk models and to understand their client base,” she says. “Make sure you risk profile potential clients and that your staff are knowledgeable and aware of what they can and can’t do.
“The more you can reduce your risk and understand your environment, the better placed you are to address these issues as they come along.”
Rise of proportional liability
Drew Fenton, principal of national insurance broker and risk management advisory group Fenton Green, has no doubt that the insurance sector has reassessed the level of risk across Australia’s financial services sector because of increased litigation.
“They’ve just about given up on Australian accountants because the loss ratios are hurting them,” Fenton says.
Regardless, having inadequate PI insurance cover is definitely too big a risk for accounting and financial advisory firms in an environment where litigation and regulatory activity is rising.
Accounting practices are increasingly being targeted in class actions launched against companies in an effort by plaintiffs to make them proportionately liable for damages sought in the claim.
“Law firms have become a lot more aggressive,” Fenton continues. “We have a public more aware of their rights under common law, so what we’re seeing is a rise in ‘no win no fee’ actions, where it doesn’t hurt to go off and have a chat to a lawyer.”
Accounting practices are particularly vulnerable in areas such as tax advice and auditing services to companies, businesses, self-managed superannuation funds and individuals, and those providing personal financial advice.
“In volume, tax makes up about 50 per cent of all professional indemnity claims ,” Fenton says. “Audit and insolvency are specific areas. They are not as great in number, but the quantum on the other side can be significant.”
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