by John M. Covaleski and Roger Russell
The current spate of massive accounting scan-dals at such companies as Enron, World-Com, Xerox and Tyco International, has trickled over to accountants' pro-fessional liability insurance, with rate hikes in the works for all firms and potentially steep ones for public company auditors.
The industry’s most prominent insurers say that rates for accountants not involved in auditing public companies rates will increase, but not drastically. For public company auditors, the insurance industry’s outlook calls for high rate climbs.
"Andersen-Enron and other situations like that are really having an impact on how underwriters are thinking about the business," said James Eisenmann, president of Chicago-based Aon Risk Services, which administers he professional liability insurance program endorsed by the American Institute of CPAs. "Anything that involves public audit, regardless of size, is getting extra scrutiny."
Eisenmann and representa-tives for rival malpractice carriers, Zurich American Insurance Group of Schaumburg, Ill., each said that their malpractice premiums for non-auditing accounting firms would not increase dramatically. However, each declined to specify the amount of increase.
CPA Mutual of Alachua, Fla. - the only prominent industry insurer to report a specific amount - said across-the-board rates would increase about 15 to 16 percent - much of that being driven by the mass of recent accounting scandals.
Insurance industry reports also suggest an increase in rates in store for accounting firms, particularly public company auditors. "Premiums for professional liability insurance for accounting firms, especially the Big Five, are likely to skyrocket in the aftermath of Enron Corp.-Arthur Andersen," noted a recent report from insurance company rating service A.M. Best Co., of Oldwick, N.J.
"Accountants are going to be held to higher standards of accountability - they’re going to find it harder to rely on boiler plate language under which they historically tried to limit liability," said Richard Tilton, a Manhattan-based bankruptcy attorney. "They will be more subject to lawsuits, especially from disgruntled shareholders and bondholders and, as a result, there will be increasing upward pressure on their premiums."
Meanwhile, there appears to be great apprehension among practitioners. "Everyone’s concerned that this next go-through with policy renewals will be off the chart," said Allan D. Koltin, president of the Practice Development Institute consulting firm in Chicago. Donald Scholl, a consultant based in West Chester, Pa., said one of his client firms faced a double-digit percentage rate hike upon obtaining new malpractice coverage when its original insurance carrier dropped from the accounting market.
Eisenmann did not discuss the possible rate hikes for non-audit firms in the AICPA program, beyond saying that they "will not skyrocket." He stressed that they will be nowhere near the levels experienced by lawyers and professional service firms.
Malpractice rates for many law firms across the country have risen as much as 25 percent, according to "The National Law Journal." The report noted that insurers are raising rates or refusing to cover law firm practice areas deemed risky.
"Rate hikes have not been the hiccup in accountants liability that many people may have thought based on what’s happened in other industries," said Chris Serreino, marketing manager for the administrator of Zurich’s accountants program, Herbert L. Jamison in West Orange, N.J. She declined to provide specific numbers, beyond saying, "Rates will certainly not be going up in large amounts."
"Camico will hold rates for the upcoming year, but not without some pressure to potentially move them up," said Ric Rosario, vice president for risk management at Redwood City, Calif.-based Camico. "The combination of 9/11, and the significant press regarding Enron and WorldCom make the reinsurers very nervous. This will make for a definite upward pressure on rates."
Insurers said that rates for non-audit firms are being kept in check because over the past year those firms have not had any unusual rashes of malpractice claims. However, there is still a threat of claims, particularly in some of the new specialty consulting areas that accountants have expanded into in recent years.
Eisenmann said practitioners providing financial planning services may be at risk to being sued by clients angry over losing investment money from the ongoing decline in stock markets. "The big one we are holding our breath on is investment planning because of what the markets have done," he said.
In early 2001, another AICPA insurance program executive reported that the program had experienced a high jump in PFP related claims.
He cited program claims data from 1993-2000 that showed PFP ranked second to tax preparation as the work area resulting in the greatest number of claims filed against CPAs, and ranked second to audit among areas where claims amounts are the highest, with a $256,000 average cost per PFP-related claim.
The AICPA malpractice program is the industry’s largest, covering about 20,000 firms of all sizes and all parts of the country. Zurich covers about 1,000 CPA firms, most of them small local firms that do not perform audit work; CPA Mutual covers roughly 675 local firms, which are also primarily local. Camico, meanwhile, covers over 5,000 firms of all sizes in 45 states.
The Big Five firms at the center of the audit controversy typically self-insure via so-called "captive" insurance companies that are domiciled in areas such as Bermuda, that provide favorable tax treatment to these entities. The captive insurers’ costs are most directly impacted by the cost of reinsurance, which they must buy to share the expenses of any damage awards from claims filed.
Although the insurers say rate hikes would be kept in check for non-audit accountants, some evidence suggests that accountants’ malpractice insurance may be headed toward a hard market of rising prices and less capacity versus the recent years of a soft market with low rate and lots of capacity.
For example, while new insurers were entering the accounting market a few years ago, this year, industry sources said two have subsequently pulled out - Safeco Insurance Cos. of Seattle and Royal & SunAlliance of Charlotte, N.C.
And one carrier that entered accounting during the height of the soft market in 1997 - Hartford, Conn.-based The Hartford pulled out a few years ago and now gives no indications of returning. One carrier entered the market in the past year - Philadelphia Insurance Cos. based in Bala Cynwyd, Pa.
There also may be a drop in capacity and increases in rates for reinsurance, which primary malpractice insurers buy to spread the risks of the coverage they provide. CPA Mutual vice president Bill Thompson said a hike in reinsurance rates was a key factor in his company’s projected malpractice rate hike.
However, Thompson also noted that because CPA Mutual is structured as a mutual company, it pays dividends to policyholders based on their premium amounts, and the dividend has been averaging about 15 percent per year.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access