Why Do Insurers Ask For Your Financial Accounts?
You will in all likelihood have had requests from Insurers to provide one, possibly two years’ financial accounts when looking to renew your Professional Indemnity Insurance (PII), or at the very least you will have had to answer some fairly detailed questions in relation to your firm’s financial background.
Have you wondered why these requests are made?
PI Insurers, generally, first started to express concerns over the financial health of solicitors’ practices in 2013, coincidentally the year when the SRA also began to take what appeared to be a much closer look, identifying some 160 firms as potentially being at high risk of financial instability whilst at the same time contacting 2,000 firms for additional financial information.
Some of the problems experienced around that period left some PI Insurers with actual or potential large losses. Examples of the issues found and which would highlight a potential problem were:
- Firms suffering significant pressure on fee income and profit, having previously experienced many years of continued growth, yet still maintaining levels of drawings irrespective of cash in the bank.
- Failures to set sustainable business plans or implement sound financial management.
- Double accounting, e.g. one set of accounts provided for lenders showing a good level of profitability yet another set for HMRC showing a loss.
Maintaining high fixed costs.
- Failure to provide for tax, VAT and even insurance premium payment.
- Firms attempting to borrow funds from their own clients.
Not an exhaustive list but one which explains the requests you now receive from Insurers.
So, what are Insurers looking for?
Here are a few pointers:
- Fee trends and/or client dependency
- SRA concerns, IVAs, failure to pay monies etc.
- Cash flow issues, e.g. a high percentage of outstanding fees
- A high percentage of debtors over 90 days
- Unbilled work, can this be evidenced as not being due to poor management?
- High fee earners, does this mean too much reliance on particular individuals?
- High overdrafts or personal guarantees, does this reflect a concern around financial viability?
- Partner drawings, do these appear reasonable when compared to current income levels?
You may find some Insurers delve a little deeper than others, and whilst some firms perhaps feel the level of questioning a little intrusive, the extent of the cover afforded under the Minimum Terms and Conditions (including the inability to withdraw cover due to non-payment of premiums) means that Insurers’ focus on this area isn’t going to go away. Therefore, whilst most are hopefully over the worst, economic pressures continue for many law firms and especially those operating in certain sectors, therefore, we would advise that all give some thought to the financial picture and how you might best present this to serve you well when your PII renewal comes around.
The above is of course only a brief guide to one area that is key for many PI Insurers in the long term and MFL are happy to assist in preparing you so as to help present your practice as well
as you possibly can.
If you wish to discuss any aspect of this article in greater detail or require assistance in sourcing an appropriate level of cover at a competitive price, please do not hesitate to contact ourselves as below.