Are professional advisors meeting the needs of the reinsurance industry, asks Julian Ward.
Is the extensive use of lawyers and accountants by the reinsurance industry cause or effect? Do they provide an essential and valuable service to the industry, or have they helped generate an environment of dependency upon which they can feast and profit? What are the main roles they fulfil, what are the gaps and deficiencies, and how could these professional advisors improve the service they provide?
There appear to be no universal answers to these questions, but there are wide-ranging perspectives and opinions, from harsh cynicism to glowing tribute.
Rules of the game
Ideally, the primary objective of the marketplace is to promote an orderly, structured, properly monitored and controlled business environment. Professional advisors should be used to assist in the achievement of this aim, and to resolve and mitigate problems that may nevertheless arise.
Beth Rees, director of insurance strategies at accountant Mazars' London operations, believes that we are seeing "increasing pressure on the client to take responsibility for his own business needs, opportunities and direction within the context of a changing global environment, both regulatory and economic". She continued: "The last year or so has seen the introduction of a tidal wave of legislation such as the FSMA, EU directives, IAS and FRS 5, proposed changes to the capital adequacy and solvency rules, Higgs and corporate governance. Ignorance is no defence and so the professional advisor can, if so requested, assist with the interpretation and implementation of these changes."
Further comment from an accountant's perspective comes from Dan Schwarzmann of PricewaterhouseCoopers, who observed that the market is being increasingly proactive in looking for solutions to problems on live as well as discontinued and solvency-troubled business. The growing popularity of solvent schemes of arrangement is but one example of a recently successful vehicle to bring about commercially-driven solutions being sought by the industry.
A recent survey into dispute resolution, commissioned by solicitor DLA, found that there was a surprising absence of consistency amongst businesses either in planning to avoid - or at least reduce - disputes or in handling them. Once a dispute has arisen, businesses rarely had policies for an early risk management analysis, for identifying escalation and monitoring reporting, or for the process of determining at what point - if at all - senior management should be involved in a dispute. Also revealed was a greater insistence from businesses for proper merits assessments, transparent budgets, and for lawyers to get off the fence in giving advice.
Many consider that the insurance and reinsurance industries have been their own worst enemy. Until very recently, the reinsurance marketplace has been steeped in tradition and entrenched business methods and interests.
It has been criticised for an unwillingness to look forward and to invest in the future, rather than concentrating on the short term. Collectively, the London market has not focused adequately on protecting its position within the global marketplace. Companies, and especially underwriters, have failed to learn the lessons of the past and thus avoid and mitigate recurrent market problems. The global increase in run-off, and solvency pressures upon many live companies, has led to the proliferation of reinsurers who essentially are trying to find reasons not to pay their claims.
It is indeed a paradox that insurance, the very industry sector that deals in fully understanding risks, often takes more ill-researched, poorly constructed, sometimes blind risks than is reasonable, fair and decent to its stakeholders.
Faced with the suggestion that professional advisors come in and 'feast' after the event like vultures, Philip Singer of Tawa Associates and a director of CX Re considered that "vultures perform a valuable service clearing up the mess others have left behind them. They perform a public health service and without them we would face even greater dangers. Don't let's shoot the refuse disposal operatives!"
Good professional advisors are essential to every industry, none more so than the reinsurance industry. It appears wrong to criticise the professional advisors for seizing the opportunity to provide much-needed services designed to resolve problems they have not been responsible for creating.
Lawyers on tap
As their professional advisory status suggests, lawyers and accountants are there to advise management, not to make management decisions. They are a valuable resource to industry that needs to be managed. In the words of one CEO, "lawyers should be on tap, not on top". The real challenge for management is to be crystal clear about the business needs and advice it seeks from its professional advisors, and to be extremely precise in the instructions it then gives. The advice must assist in the determination of an ensuing business decision; it should not be an achieved objective in itself.
PwC's Mr Schwarzmann offers his opinion on the key professional qualities of an advisor: "Core competency is normally taken for granted, other factors make the difference. These factors include having the necessary professional and industry expertise, keeping an open mind to new and different solutions, focusing on commercial value, demonstrating a willingness to decline assignments where value cannot be added, and promoting a 'can do' attitude." He also added to the chorus of practitioners and industry executives who insisted upon the bravery of professionals in getting off the fence and providing commercial, practical advice.
It appears that some professional advisors bite off more than they can chew, either from an expertise or from a workload perspective. Whilst this does not necessarily mean a reduced quality work product, it does frequently lead to delayed reporting. Within a claims environment, this may, for example, mean that attorney reports providing reserve updates are delayed, particularly critical to live companies needing to prepare renewal information and for all solvent companies to determine and process year-end reserve figures.
As to requisite expertise, Ms Rees commented: "There is always the temptation for a professional advisor to act outside of its skill set, especially if the engagement is of a high profile and likely to be commensurately rewarded. In the reinsurance market, however, which is highly regulated and where the advisor is presented with complex problems, then this issue rarely arises because the risk of getting it wrong in terms of reputation and litigation does not bear contemplation. The professional advisor must ensure he keeps a grip on reality."
Simon Kilgour, a partner at London-based solicitor Reynolds Porter Chamberlain, believes that lawyers, including litigation practitioners, should be viewed as a tool in the achievement of a client's commercial objectives. Lawyers are there to help protect their clients' interests, uncover issues, manage the evidence, take necessary legal steps, make legal points, and use these as levers to apply pressure towards a commercial conclusion. "When all is said and done, disputes are about money. It all comes down to the bottom line. That must drive our approach," he commented.
Risk of dependency
Many industry professionals consider that accountants and lawyers are used as a 'crutch' in their strategic, financial or problem-solving strategy.
Far too often some clients pass across 'issues' to professional advisors in the hope they will 'sort them out' (and move the problem off their desks on to that of somebody else). Where this is the true, naive motivation, the result is almost invariably that the responsibility and decision will return to the client's desk for resolution, only this time already carrying the burden of an expensive advisory price tag around its neck.
Further, a client can become reliant upon that service and fail to maintain or develop the requisite expertise in-house. If this is a conscious, strategic decision - fine. However, it should never be allowed to become a slow, creeping realisation.
Most industry executives, however much their actions may sometimes appear to infer otherwise, believe lawyers are instructed too much as a knee-jerk reaction to claims and disputes. There are circumstances where this may be necessary and fully justified, such as those claim groups where there is a need to create and maintain privilege (US asbestos claims into London being a prime example). Where the challenge then comes is for the lawyers to be encouraged (against their instinctive fee-earning judgment) to pass back to the client, or less expensive service companies, those non-legal routine claims and technical accounting aspects of these cases.
Getting off the fence
The most common criticism of lawyers and accountants is their unwillingness to 'get off the fence', to provide an upfront, candid assessment of the need for their services, the potential value likely to be provided and finally a clear interpretation of the significance in a commercial context of the advice given.
One industry executive commented: "I have never had a situation where my lawyers told me I was going to lose, but guess what, I have lost a lot of cases!" The CEO of a large company in run-off commented that hardly ever does a lawyer come in, review a problem situation and conclude that "you have no chance, don't waste your time". The same CEO feels strongly that the advisory industry is beginning to learn the lesson that there is more opportunity for long-term revenue by providing clear, commercially driven advice than from the far more profitable but short-term wins of protracted one-off assignments. Clients will ultimately reward advisors for their bravery and candid honesty.
An extension of the above problem is the failure of lawyers to speak up at the earliest opportunity, to say that the strength of a case has deteriorated. All too often this is revealed fully and openly only much further down the track, after a lot of time, effort, money and reputational damage have been incurred.
A pet hate of many recipients of professional advice is that it is too general and not specific to their particular situation. Ms Rees succinctly summarised this: "No one wants their professional advisor to provide them with advice that merely paraphrases a text book, an article or is an extract from a website. The client is seeking a balanced view on how a legal or accounting issue impacts their business."
Most professional advisors are engaged once a problem, perceived or actual, has arisen. Surely they should be used more for preventative rather than curative purposes? Why are lawyers not brought in at the contract placement stage to advise upon wordings? Why are accountants not brought in to advise upon averting a solvency crisis instead of overseeing the company's demise?
Frustratingly, where there are issues concerning solvency, the professional advisor is all too often called upon at a point where the range of options open is severely limited. Ms Rees observed: "What the fool does in the end, the wise man does in the beginning." Accountants have become increasingly adept at finding workable solutions for companies which are financially impaired or considering exit strategies. The sooner a dialogue takes place, the greater the potential for the advisor to add value.
Reynold Porter Chamberlain's Mr Kilgour believes that most re/insurance disputes are avoidable, noting by way of example that about a third of his current cases hinge on non-disclosure issues. Another insight offered is the opinion that if a client needs to make new law to win a dispute, he probably does not have a strong case. Further, the temptation for lawyers, especially barristers, to push for the opportunity to create new law can easily diverge from a client's best interests in achieving the optimum commercial solution. It is all too easy to find oneself in a complicated dispute with the lawyers scoring legal points against each other. Sometimes the lawyers allow disputes to become emotionally charged and create an environment where principal-to-principal dialogue disappears. In such circumstances, the client must identify this and take a firm hold of the dispute management process.
One leading London market law firm marketed itself some years ago by asserting the fact that 50% of the reinsurance cases being heard in the High Court involved the firm. This was a gross tactical misjudgment in that many actual and potential clients drew back from endorsing an approach whose measure of success was 'running a case the distance' rather than achieving commercial success in the form of savings for their clients.
Within the legal field, conditional fee arrangements appear to address the issue of ensuring a lawyer believes in the case and "puts his money where his mouth is" to share the risk with the client. Mr Kilgour is a firm proponent of the no success, no fee approach where appropriate, but notes that it does have some unique weaknesses, such as this is one of the rare circumstances where it is necessary for the client to give the lawyer freedom to drive the case. The quid pro quo is that the lawyer is not going to offer this sort of arrangement unless he is very confident of at least a 60% chance of success.
All too often, clients find that they are dealing with the other side's lawyers when seeking a commercial as well as legal dispute resolution.
It is far more preferable that the lawyers encourage principal-to-principal discussions throughout the entire process. 'Windows of opportunity' for commercial resolution must be identified wherever possible. The DLA dispute resolution survey highlighted the market perception that whilst litigation and arbitration were the most commonly utilised dispute resolution methods, the greatest perceived successes came from mediation and other forms of alternative dispute resolution (ADR). One user of mediation noted: "Never be concerned about showing signs of weakness if you believe that resolving a dispute is important to the company." Another user of mediation more cautiously commented: "Mediation and ADR will grow, but won't grow at anything like the rate that people would expect." This is echoed by Mr Kilgour who observed that lawyers are rarely in possession of all of the facts pertaining to a client's circumstances and the behind-the-scenes goings on between the parties to a dispute. "Suddenly a specific dispute can pass its 'sell by' date once placed within the context of a global discussion and potential settlement." Only the client can make that final judgment call.
Watching their backs
Professional advisors normally charge by the hour for their services based upon time spent, and there are inherent pressures upon partners and employees alike to increase their chargeable hours. What immediate financial incentive is there for them to tell a client he has no need for their services (for example, pay the claim), and move on? None. It comes down to the integrity of the advisor to act honestly, openly and professionally. There is often huge pressure upon professional firms, especially lawyers, to accept instructions where their expertise and/or experience do not merit their appointment. Naturally, this applies more to the smaller firms than the larger ones. General market opinion is that lawyers and accountants should be encouraged far more to "lay it on the line" with their advice.
Potential errors & omissions claims may arise from succumbing to any of the above pressures. While this approach is a financial recourse for the client where applicable, it is all too often the inherent barrier to them receiving plain, simple, honest advice. Having created such a very litigious environment for the advisors to operate within, it is perhaps not so surprising that professional advisors choose to sit on the fence wherever possible. Is it fair for businesses to want to have their cake and eat it?
Professional advisors will need to become ever broader in their commercial awareness of a client's needs, whilst at the same time becoming ever more innovative and specialised in the services that they tender in meeting those demands. Accountants will need to continue to develop innovative exit strategies, help clients identify and execute revised capital adequacy requirements, and assist with regulatory compliance. Lawyers will need to focus more upon prevention rather than cure, make more use of in-house counsel and become ever more focused on commercial objectives and solutions rather than legal 'successes'.
The perceptions of businesses are shifting, but not all professional advisors have heard the wake-up call. Ms Rees commented: "At the end of the day, the relationship between the professional advisor and the client is a symbiotic one. Unless we do our utmost to ensure our clients' success and meet their needs, our tenure will be short lived."
Tawa Associate's Mr Singer recalled a eulogy of Mark Antony, presumably with the insurance/reinsurance industry in mind, when he said: "The evil that men do lives after them, the good is oft interred with their bones." Professional advisors are the effect, not the cause. Don't shoot the piano player.
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