How to Combat the Rising Cost of Professional Indemnity Insurance (PII)?
One of the biggest costs for legal firms continues to be Professional Indemnity Insurance and it’s one which many are seeing rise, year-after-year. The situation isn’t new but it has now been confirmed as the hardest market for indemnity cover since demutualisation over 20 years ago* and it’s certainly taking its toll. With premium increases of between 5% and 50% being regarded as ‘typical’, how can firms manage this situation? To make matters even more challenging, some insurance companies are now seeking personal guarantees and demanding that policy excesses be paid into escrow.
It’s a situation which is stunting growth and having a much more significant negative impact in many cases, so the key question is ‘what will reduce the overall cost and negative impact on cash flow’?
Speaking to Neil Sharp, MD of TML Finance & Advisory, it seems there are options which many firms simply aren’t investigating, which are playing a huge part in maintaining positive cash flow during a time when many are seeing turnover down 10% on average*. Mr Sharp commented “We’ve seen this situation coming for a long-time and the negative impact is stronger than ever now – not just in terms of the increased costs being incurred but the reality of having to find vast sums of cash, often more than anticipated in the first place. It is becoming harder to accurately budget for, until very close to the renewal date and many are simply being caught out by the situation and making rushed decisions which are bad for their business.”
One of the key issues is the pressure that comes from the timing of the renewal. Often firms are stretched in terms of capacity and simply not being proactive in their search for the best quote, which is a false economy. Even when they are, they are not considering the true impact of paying their premium for the year ahead, whilst keeping up with all the other commitments. Add in the prospect of having to also pay their policy excess into escrow; and it is a big issue causing lots of stress and strain. Indeed for many firms it is crippling cash flow and forcing them to make tough decisions in the short term.
Naturally having PII isn’t a choice but how you manage the impact of the cost, might be. Talking further about the current situation, Mr Sharp continued “the sad truth is that many firms assume because they can’t spread the cost of PII via their insurer, that’s it. That’s absolutely not the case and we can arrange finance to do exactly that for this specific instance for legal firms. It’s vital for them that they do not compromise on their policy cover so they need a solution which spreads that cost and keeps as much cash in the business for as long as possible. This helps the business to actually earn the revenue which will pay the associated cost each month, rather than all twelve months in advance.”
Whilst simply spreading the cost of PII sounds like a relatively simple concept, the key question is ‘why not just find an insurer offering monthly payments?’. The answer to this question was potentially the most valuable of all given the associated costs and true value of even the tiniest percentage saving. “You have two costs in this scenario whoever you speak to; the cost of the insurance and the cost of finance – even if the insurer offers it to you. It’s vital you get separate costs as you will be amazed at how much you can save by combining the value policy with the best value finance option. The savings can be phenomenal and our expert panel are specialists in this specific area, understanding the risk: reward and helping clients to do the same.”
Coming off the back of one of the most challenging years for the UK economy in recent memory, being finance savvy is absolutely crucial. One final and insightful piece of advice from Mr Sharp was that “firms have got to plan ahead and utilise genuine experts to help. Last minute searches for holidays is one thing, but it is rarely a good decision when it comes to PII. You need to be proactive early on and speak to experts who have relevant experience, saving you valuable time as well as money at every renewal.
Get in touch
If you would like more information on spreading the cost of Tax & Insurance, including PII. Get in touch.