Retail Market Update. Risk Solutions - Bristol Spring 2014

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1 Retail Market Update Risk Solutions - Bristol Spring 2014 Welcome to the spring edition of our market update. Already this year there have been a number of headline grabbing events which have captured the attention of the media and brought a focus on the insurance industry and the topic of risk. We started the year with some of the worst flooding seen for over 100 years with a number of our clients in the South West and across Thames Valley affected. Whilst we issued risk management guidance at the time, the flooding highlighted the need for businesses and practices in the 21st century to have the means to enable staff to work from home and for data to be accessed and indeed preserved. Many of our clients have since spoken with us on the subject of Business Continuity and Disaster Recovery and as a result engaged our in-house risk management teams to assist has also been eventful for us as Lockton Bristol and our sister office in Edinburgh were shortlisted for an industry award (Commercial Insurance Awards - Team of the Year). Whilst not the eventual winners, we were the only broker shortlisted and were up against two giants of the industry in QBE (the eventual winners) and Allianz. The shortlisting of our business gave me immense pride as this recognised the achievements of the teams in delivering excellent client service and client retention, success in winning new clients and our Community and Charity engagements which culminated in the team donating over 100 Christmas Presents to the Bristol Children s Hospital for sick Children last Christmas. Another high point was seeing Lockton Associate Jessica Durston being highly commended and selected as the runner up for the Young Achiever of the year award at the Bristol Insurance Institute Annual Dinner. Most recently the Budget has dominated the headlines, changes announced in the budget will label promoters of tax schemes who have been found guilty of defaults as monitored promoters or high risk promoters. The impact of such a designation is to give HMRC enhanced powers to obtain information from them during any investigation. Notification of high risk status to investors There may also be a requirement for monitored or high risk promoters to flag this increased risk status to investors/ potential investors. Payment of disputed tax sums at the start of an investigation From a potential claims notification perspective, the most significant change is that clients whose tax affairs are being investigated may, in certain circumstances, be required to pay any disputed tax sums in full, at the start of an investigation, rather than when a final determination is made.

2 The circumstances where this applies are as follows: where the tax scheme should have been disclosed under the Disclosure of Tax Avoidance Scheme (DOTAS) rules; or is caught by the General Anti-Abuse Rule (GAAR); or where the tax scheme concerned has already been the subject of a tax tribunal case, which the HMRC has won. In these circumstances, where there is no appeal outstanding, HMRC may invite other investors to settle. If they do not, in addition to paying the disputed sum upfront, they risk an additional penalty. Insurers, already wary of tax advice work, are likely to be looking very carefully at practices which have been involved in advising clients on complex tax mitigation schemes. How Lockton can help? If you have concerns regarding your exposure to potential tax claims, please speak with one of our associates for advice. We can evaluate the risk profile of your practice, help you address any significant risk issues, identify suitable markets to place your PII, and assist you make the best renewal presentation to those markets. HMRC are also being granted new powers to recover unpaid tax direct from taxpayers' bank accounts. Increased Professional Indemnity claim notifications? While the number of claims ultimately made may not increase significantly, taken together, these changes are, at the very least, likely to bring forward any claims clients may make against professional advisers (IFAs, Accountants and Solicitors) as their losses are crystalised at a much earlier stage.

3 Understanding Business Interruption The recent extreme weather and well publicised flooding highlighted that major, unforeseen events can have a profound impact on homes and businesses that can be difficult to recover from. If your business is unable to trade or if you are unable to access your premises what impact will this have on revenue? In the modern world many businesses particularly professional practices will be able to maintain a trading presence, but only if they are prepared for disasters or interruptions. Whilst thankfully flooding to the extent of that seen in December and January is rare, damage to and loss of telecoms and utilities is more common. If your premises was unable to sustain your business even if only for a limited time what would you do? The insurance industry recognises the basic principles and practices of business continuity and any programme of Business Interruption Insurance (BI) should complement this. Business Interruption requires concentrated attention because it cannot be altered after a disaster occurs. BI insurance is inextricably linked to property damage insurance and is sometimes termed consequential loss or loss of profits / revenue insurance. Many aspects of BI insurance replicate business continuity planning. Especially the business impact analysis aspects of it. The intention of BI insurance is to restore the business to the same financial position as if the loss had not occurred. BI insurers insist that any property (which may lead to an interruption) is insured against loss or damage so that funds are provided to pay for the repair or replacement. This policy requirement is known as the Material Damage Proviso and typically; When deciding on the best means of protecting the Business / Practice, thought should be given as to whether substitution of lost Revenue / Fees is the best form of protection or whether the business could better operate with a provision for costs incurred to avoid an interruption? If selecting a Revenue / Fee protection, the business activities to be insured must be identified and will need to capture all of the organisation's business, including future acquisitions, or newly created entities or new ventures. When deciding on a Maximum Indemnity Period you should consider what the maximum period could be before normal trading is resumed. An important component of BI insurance is the coverage for what is termed Increased Costs of Working - these being the extra costs that Businesses / Practices have to pay to stay in business. These can be difficult to estimate and, in some cases, can be the principal exposure of an organisation. Most Office / Package Policies will limit liability to a defined limit / sum insured and costs that are reasonably incurred. In short, you can spend 1 to save 1 but no more. Therefore, if a constant service is required for your clients come what may, and being unable to service your clients could result in the loss of relationships and future income, thought should be given to arranging Increased Costs on an Uneconomic (or Additional) Basis. If you are in any doubt or would like clarity on the basis of your own Business Interruption Insurance and / or Business Continuity please speak with your insurance advisor....the Company will not be liable for any loss under this Policy unless the Insured s property destroyed or damaged at the premises is insured against such damage and the Company by which such property is insured shall have paid for or admitted liability in respect of such damage.

4 Additional Points 1. A recent UK study indicated that power disruption was the key risk that many organisations identified in the BI exposures and the insurance protection available is not always as wide as some businesses may think. Another factor with policy extensions for dependencies / utilities / customers suppliers is that there is often a time deductible, i.e. the coverage only commences after, say, seven days and there is invariably an upper limit to the insurer's liability. 2. A critical cost to Insure in BI insurance is that restoration of records whether hard or soft is specifically included in the cover. 3. Another problem with BI insurance is that specialised covers are needed for the breakdown of critical plant or machinery and exactly the same considerations apply to computers / EDP / IT systems. Here any interruption, particularly for real time operations, can be financially devastating and appropriate, specialised, insurance is needed. 4. Some businesses with a very wide spread of sites throughout the country may decide they have sufficient in-built provisions to operate from another location and, consequently, only insure for increased costs of working, which would be the main expense they would incur because they figure that their gross income would not be reduced. 5. If a company has a robust business continuity plan, it should be conveyed to the BI insurers so that the plan can be taken into account when establishing coverage and, more importantly, premiums. After all, the BC plan protects the client and the insurer. 6. There is also a standard assumption in BI insurance that the business will be continued and not wound up. This is to prevent any company from deciding they will not resume business and think they can make a substantial claim on their BI insurance - not so - you can't shut up shop and expect a business interruption claim to be paid. Chris Lennon Head of Office Bristol +44 (0) chris.lennon@uk.lockton.com

5 Combatting the rise in plant theft Current estimates say that construction and surveying plant theft is costing UK businesses up to 1.5million each week and this is predicted to rise. The construction industry estimates that plant is stolen every year to the value of 70million. The cost of replacing the stolen property is often insured, however, it is the uninsured cost of downtime and idle crews along with the knock-on effect of increased insurance premiums that could have serious implications on the profitability of some businesses in an industry that has already suffered during the recent downturn in the economy. High value plant has always been surprisingly easy to steal. Manufacturers, for many years, did not fit security devices as standard and it was not always practical for contractors to spend time and money fitting after-market devices or create more secure areas for the storage of plant at the end of the working day. It was not difficult to find a 60,000 excavator, without any form of reliable security, being left overnight on an open contract site. Equally, a significant amount of driven plant is not road registered and often manufacturer markings are either difficult to find or easy to remove. This means that, not only has it been easy to steal high value items of plant, the lack of proper identification means that Police cannot accurately identify rightful ownership should they suspect an item is stolen. Statistics from the Police and Insurers show that 24 hours after a theft has taken place most stolen plant is in a container ready to be taken outside the country. It is common for thousands of shipping containers to leave the UK without checking if the consignment documents match the cargo. The Plant Theft Action Group (PTAG), is a Home Office advisory group reporting to the Government, and attempts to reduce the impact of theft that organised criminal networks have on the Construction Industry. In consultation with the Police they launched a National Registration Scheme for construction plant in CESAR (Construction Equipment Security and Registration) is a covert and overt identification and registration system for plant. Construction plant items will be registered on a central database with a secure 24/7 call centre. It provides security marking - overt bonded triangular shaped unique security markings combined with advanced technology covertly applied to the plant and enabling immediate identification of ownership by all UK Police forces who are equipped with a handheld data scanner. CESAR has been proven to deter theft, however where plant is left unattended on contract sites, additional physical security devices are essential to limit the potential for unauthorised movement. Thatcham, a company that specialises in the development and testing of security devices, has developed a security rating system for plant manufacturers. It awards security stars for Thatcham tested security devices proven to resist theft. The security star rating provides an indication of the level of antitheft protection based on key security features. A 3 Star Rating is viewed by the Construction Industry Theft Solutions (CITS) group as a sensible minimum requirement to insist upon when purchasing new driven plant. JCB were the first manufacturer to sell plant certified with a 3 Star Rating, however, there are thousands of items currently in use without any form of reliable security at all. CITS therefore recommend that Aftermarket Theft Prevention devices are fitted. Additional resources are now joining the fight against this, increasingly organised, wave of crime. The Plant & Agricultural Intelligence Unit (PANIU) has been set up by the Metropolitan Police. It provides a national focal point to tackle plant theft. Insurers and CESAR are now working together to establish a UK database of stolen plant and this information is shared internationally via Interpol. Together, the PANIU and CESAR are having a positive effect on plant crime with recovery rates on stolen equipment doubling since the setting up of the PANIU in October Most insurers of contractor s plant offer generous premium and excess discounts to new and existing customers with a good claims history which itself has been generated by a voluntary and proactive approach to management of their theft risk. There are some discounts permitted for embracing risk management initiatives such as CESAR. Risks presented to insurers are normally each underwritten on their own merits giving consideration to the positive risk protection features. For more information, please visit or speak to your insurance advisor. Scott Brown Assistant Vice President Bristol +44 (0) scott.brown@uk.lockton.com

6 ICAEW firms to be first to compete with lawyers in lucrative probate market On 11 December 2013 the Legal Services Board approved applications by the ICAEW under the Legal Services Act 2007 to become both a regulator of probate services and a licensing authority for alternative business structures. ICAEW members will be able to carry out non-contentious probate work, a reserved legal activity. The applications are subject to final approval by the Lord Chancellor and which is expected to be granted shortly. The Market Increasingly members of the public obtain grants of probate without professional help. In 2010 some 36% of applications were done without legal representation. Nonetheless the market for legal services connected to probate work is estimated to be worth over 1billion and probate work forms a cornerstone of many solicitors practices, particularly on larger estates where solicitors still often charge a percentage of the estate s value. Whilst obtaining a grant of probate is a relatively small part of the overall work carried out in connection with wills and the administration of estates, the reserving of this activity currently to solicitors, barristers, notaries and licensed conveyancers is a key impediment to accountants undertaking more work in the area. Currently solicitors carry out 86% of the work where professional help is used, with banks and accountants for example obtaining a 2% market share each. Probate Regulations As part of their applications and the regulatory framework, the ICAEW has formed a Probate Committee with fully delegated powers in order to approve applications from firms and ensure that the regulatory functions are separated from the ICAEW s representative ones. The ICAEW has also published 53 pages of Probate Regulations which will govern the authorisation of firms. Under the Legal Services Act 2007, a firm can apply to either be an authorised firm or, in the case of an alternative business structure or where not all principals are authorised, a licensed firm. The detailed Regulations reflect this. In order to proceed down the authorised route, all partners in an ICAEW firm will have to become authorised individuals and only an authorised individual will be able to carry out or control probate work. They will have to complete a relevant training course and assessment, which will cover areas such as an introduction to the law of property, equity and trusts, the intestacy rules and the obtaining of a grant of probate. Alternatively they will have to hold a qualification from one of the other approved regulators, which will shortly also include the Chartered Institute of Legal Executives. Otherwise firms can choose to go down the licensing route. They will be required to have a Head of Finance and a Head of Legal Practice, who must be an authorised individual. All firms will be subject to annual compliance checks. Any firms seeking accreditation must comply with existing ICAEW guidance on complaints handling and also the clients money regulations, with the added requirement that client monies be held in individual accounts. It is worth noting that accredited firms will also have to be subject to the jurisdiction of the Legal Ombudsman and clients advised of this. PI Insurance The ICAEW has also announced important changes to the minimum wording applying from 1 January 2014 and which again have been necessary in order to obtain the approval of the Legal Services Board. In respect of probate claims, there will now be a separate limit of indemnity of a minimum of 500,000 on an each and every claim basis and exclusive of defence costs. This is a significant extension to the existing cover, which was previously solely on an annual aggregate basis. For other claims that annual aggregate will remain and will not be eroded by probate claims. Most firms carrying out probate work will wish to obtain a higher limit of indemnity and given the size of many estates. If they carry out work on ones that exceed the amount of their cover then they must write to the clients at the outset to inform them of that fact and disclose their level of cover.

7 Spring 2014 Bristol Retail Market Update In an associated measure and to ensure further potection for beneficiaries, the ICAEW is also setting up a compensation fund to cover uninsured claims, funded via levies from members. Any payments from the fund will be capped at 500,000 per estate and subject to total payments in any one year of 5,000,000. ACCA ACCA firms will need to be a little more patient. ACCA was approved as a regulator for probate services by the Legal Services Board in 2009 but does not currently authorise anyone and there have been delays in putting the necessary regulatory arrangements in place. The Future The ICAEW estimates that some 250 firms will apply to be accredited. Once ACCA satisfies the necessary regulatory requirements the numbers of accountancy firms competing with solicitors will increase significantly again. Although some practical difficulties remain for accountancy firms regarding the absence of legal professional privilege and the inability to conduct contentious work, the ICAEW is expected to apply in due course to regulate the conduct of litigation and which is also a reserved activity. This latest development is a significant landmark in the enormous changes taking place in the legal services market and albeit that they continue at a slower pace than expected. Ed Anderson Partner Beale and Company Solicitors LLP +44 (0) e.anderson@beale-law.com Risk Solutions A division of Lockton Companies LLP. Authorised and regulated by the Financial Conduct Authority. A Lloyd s broker Registered in England & Wales at The St Botolph Building, 138 Houndsditch, London, EC3A 7AG, Company No. OC LLP 1000c - April