January 2023’s new IFRS 17 standards increased the attention and engagement required from insurers when undertaking the process of risk assessment and quantification. Marielle van de Weijenberg, Managing Director of Aon Professional Services in Amsterdam discusses the impact on lawyers and notaries in the Netherlands.

“Can you arrange that?” is a question often asked by Dutch lawyers and notaries to their insurance brokers.

By arranging, they mean can their broker quickly and correctly place insurance that protects them against professional errors and omissions. To accept this risk transfer, insurers must follow a careful process of risk assessment and quantification.

This applies to all sizes of firms, but boutique firms that operate specialized practices (e.g., M&A, international practice, property, IP, etc.) pose a higher level of risk, requiring even closer examination.

Changes Resulting from IFRS 17

The introduction of the new IFRS 17 standards, on January 1, 2023, increased the attention and engagement required from insurers when undertaking the process of risk assessment and quantification. Dutch insurers report in accordance with the guidelines of the Annual Reporting Council (RJ). Insurers will need to conform to the new standard once the RJ brings their guidelines into line with IFRS 17.

See the Dutch Association for Accountants for detailed information.

Long Duration of Claim Cases

In accordance with IFRS, along with other factors, insurance contracts are valued based on all relevant incoming and outgoing cash flows that the insurer needs to meet its obligations, including future cashflows. Proper claims information is essential for valuing future cashflows.

Professional liability for lawyers and notaries is complicated as it is a long tail risk. Professional liability cases can run for decades. Unlike, for example, collision damage to a car or fire damage to a building, the monetary loss associated with these claims is uncertain. Insurers must adjust their original valuation of the potential quantum in response to updated information in these long running matters. As a result, there must be a continuous and regular flow of information between client, insurance broker and insurer.

Unexpected Increases in Claim Quantum

In recent years, there has been sudden and unexpected increases in the quantum of claims against lawyers in the Netherlands. This has likely had a negative influence on the attractiveness of law firm and notary coverage to insurers. Some Dutch insurers have switched their focus to other, more profitable insurance lines. The remaining insurers have drastically increased premiums and imposed more stringent firm risk management requirements.

To be clear, that claims occasionally “explode” is not the problem. It is when this happens unexpectedly that issues occur, due to the impact that this has on future cashflows and the earlier mentioned need to be accurately account for claims (in advance of any major claim payments).

Importance of Good Data

Good claims data can help insurers. One might assume that this data is available at the touch of a button. Unfortunately, this is not the case in the real world. Lawyers and notaries often store the necessary information on different internal systems and often these systems do not communicate with each other. The data is also stored by the insurance brokers and insurers, who in turn have their own datasets and systems.

However, insurers must be provided with the appropriate data by the lawyers and notaries and their insurance brokers. It is not just a question of what comes in (premium) and what goes out (claims payments). To properly underwriter large professional liability risks historical information is needed, ideally going back as much as 20 years and showing how the quantum of a claim develops, details about the settlement process, the nature of the professional error, and so on.

Healthy Business Relationship

With this information, insurers can form an opinion on the risk profile of different types and sizes of firm. The better an insurer can assess this relative risk, the greater the chance that the premium will be calculated accurately.

This may mean higher premiums for some firms. This is not necessarily a negative. Insurance companies are cautious about the professional liability risks of lawyers and notaries. To be able to count on your insurer over the long term, they need a predictable and profitable business. After all, you want to be insured not only today, but also in the future. This allows a firm to manage its practice with confidence, knowing that the firm and its clients are protected in the event something goes wrong.

The development of a long-term and healthy business relationship with an insurer depends on providing insurers (and hence their reinsurers) with good and relevant information. This strengthens their willingness and ability to continue offering coverage with relatively stable policy terms and premiums.

There are evolving challenges in arranging professional liability insurance. Aon is doing its best to meet and overcome them.

Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained on this webpage and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.

Contact

The Professional Services Practice at Aon values your feedback. To discuss any of the topics raised in this article, please contact Marielle van de Weijenberg.

Marielle van de Weijenberg
Managing Director
Amsterdam

View Articles by Marielle van de Weijenberg