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How business can prepare for skyrocketting Professional Idemnity Risks

 

How business can prepare for skyrocketting Professional Idemnity Risks
18-08-22 / Tau kaVodloza

How business can prepare for skyrocketting Professional Idemnity Risks

Johannesburg - The growing litigious culture in South Africa, coupled with the turbulence of the economic climate, has led to a considerable upsurge in professional indemnity (PI) claims. Following a drop in claims notifications during the first year of the pandemic, claims in 2021 jumped back to almost pre-pandemic levels.

Most recently, claims in the legal fraternity have increased dramatically, along with a 350% surge in claims relating to construction risks. These developments highlight the importance of obtaining adequate PI insurance as part of a forward-thinking risk management strategy. 

Providing insight on this topic is Malcolm Padayachee, Business Head of PI and Liability at SHA Risk Specialists who cites SHA's finding that in 2021, 33% more claims were recorded than in 2019.

Industries at risk

"We're seeing this trend across sectors, although several industries have shown significantly higher claim levels, including the legal sector, companies who head up built environment projects and accountants, specifically in the tax management arena. The latter sector saw claims increasing by 122%, with almost a quarter relating to negligence around tax submissions."

The skills shortage in South Africa as a main driver of increased liability

Providing a perspective on the reasons behind this surge in PI claims, Padayachee points to the existing "brain drain" in South Africa as a major contributing factor. Between 5% and 66% of respondents to SHA's 2022 Risk Review reported a drop in the standard of graduates entering the workplace. Furthermore, a number of professional services firms reported the loss of just under 50% of their senior staff to emigration. 

The knock-on effect of this skills shortage on industries such as construction, which rely heavily on the supervision of juniors by senior staff, is that a higher level of risk is introduced. Ultimately, this has an impact on the number and nature of claims, with a significant amount of high value claims stemming from projects being delegated to junior professionals without adequate supervision. In the long-term, this reality will also have an impact on skills transfer. 

Another resultant reality of the skills shortage is that clients are facing increasing pressure to take on work outside of their professional scope. This can be attributed to increasing labour costs and revenue pressures brought on by the tough economic environment. 

This impact is being felt acutely in the architectural industry, with architects having to perform project management functions in addition to design work. This trend is behind the higher claims frequency and severity across the sector. For this reason, it is vital for firms to notify their specialist insurers of the emergence of expanded or more encompassing roles in order for premiums and the extent of cover to be adjusted accordingly. 

In addition, insurers can play a central role in helping to mitigate these emerging risks, as Padayachee suggests, by implementing incentivisation schemes around mentorship, and peer review systems, as well as by offering discounted premiums or lower deductibles to companies that implement supervision systems. 

PI insurance as the cornerstone of risk management

In advising business owners on how to protect their companies from this higher level of risk, Padayachee asserts that: "brokers and their clients must see PI insurance policies as one factor within risk management. Buying a policy does not allow the client to forgo their responsibility for managing risk. Clients therefore need to be educated on how to use measures, policies and protocols as risk mitigation tools."

Risk reviews are imperative in this regard. Companies are encouraged to establish a formal system for recording and reporting on liability issues or negligence-related incidents as part of their due diligence processes. Insurers need to be kept in the loop every step of the way, as a way of preventing a bottleneck of liabilities that could deal a significant blow to the revenue and operating capacity of companies. 

Padayachee finds encouragement in the fact that much progress has been made in this regard, with 60% of survey respondents indicating that they maintain a risk register, and 84% reporting that they share this information with their insurer. The remaining 40% however, is cause for concern. 

"Clients who neglect to include a risk review in their due diligence processes put themselves at risk by increasing the potential of severely curtailing the discussion that takes place at policy renewal stage. In the long-term, this will have a negative impact on the setting of appropriate deductibles, the determination of premiums and any limits imposed," explains Padayachee. 

As he concludes: "the upsurge in claims has also alerted underwriters to the risk posed by the inefficient delegation of authority, particularly in attorney and conveyancing firms, where one in five PI claims emanated from incidence of email fraud and theft. For this reason, underwriters are taking a hard line, scrutinising the due diligence and verification processes of insured parties. Where these processes are not stipulated outright and followed closely, claims will be rejected. 

For this reason, a dual focus needs to be placed on obtaining adequate cover and demonstrating that the appropriate measures are being taken to protect companies against liabilities."

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