When considering insuring professional service firms’, the focus tends to be on the business activities, fee income and claims experience. And it’s fair to say that these do tend to be the main influences on premium, alongside a question set to identify any red flags. This should allow the underwriter to classify and discriminate accordingly.
However, in some cases, and particularly where underwriting is automated, this can deliver a one-dimensional view of the risk. Whilst automation and the efficiencies that technology can deliver have a part to play in all businesses, good, old fashioned subjectivity and judgemental flexibility also have a key part to play in the underwriting process.
We know that well established organisations with experienced management are likely to execute a strong and stable business model and have long-term client relationships. They value their reputation and put a strong emphasis on customer satisfaction and the quality of services they provide. We also know that financially stable risks are less likely to alter their business model, engage in mergers, acquisitions or have fluctuating staff numbers. Conversely, those in financial distress may look to try new activities or stretch their resources, potentially affecting the nature and quality of the professional services they provide. An organisation experiencing either rapid growth or downsizing often struggles to adjust to the resulting workflow changes. Employees can become distracted by internal issues, and may be more likely to make an error. Most PI policies also cover dishonesty of employees, so it’s important to know what staff controls are in place and whether references are obtained when hiring, particularly in phases of rapid expansion.
Underwriters will often want to understand what type of contracts are used by a firm providing professional services.
Dig a little deeper and there are further indicators of risk within an organisation. Underwriters will often want to understand what type of contracts are used by a firm providing professional services. Contracts between a service provider and their client are a powerful risk management tool. They often outline the services to be provided, and thus reduce the chance of a misunderstanding in the first place, but define clearly what happens if there is a dispute. Ideal contracts should be standardised, legally reviewed and contain:
- a specific description of the services being provided;
- hold harmless agreements in favour of the service provider;
- a dispute review process;
- limitations of liability; and
- consequential loss exclusions.
Underwriters will also take a look at the level of competition within a professional service firms industry sector. Stiffer competition could leave a service provider facing a reduction in revenues or thinner margins, and this may impact on cost savings and have attendant conflicts. If there is a professional body, there may also be more exposure to mass actions or investigation costs.
Sub-contractors are also an area that merits attention. It is not unusual for a service provider to subcontract a portion of their service, particularly if the firm lacks expertise in-house. One of the more unusual examples of this was where a project manager engaged the services of a specialist ‘Newt-Fencer’ to build a protective area around an endangered UK species during a construction project. This sub-contracted work, provided it is delivered on behalf of the insured, should be covered by a PI policy, so it needs to be understood. Ideally the overall percentage of this work ought to be low but underwriters may ask what specific services are undertaken by the subcontractor, how often their work is reviewed and what level of control and supervision is in place. A check may also be made on the requirement for the subcontractors to maintain separate PI insurance and, preferably, require them to hold the firm harmless in the event the subcontractor’s actions give rise to a PI claim. These measures preserve the firm’s PI insurance for their own negligence and facilitate an easier path of subrogation.
Underwriters will also look beyond the regular application information and research the firm online through company websites and social media. So, whilst a computer might not ask many questions, it may not get to the science of the underwriting process. And if you think the underwriter is just being nosy, that’s because they probably are, because the consequences of this might mean a far less painful outcome for all concerned.
