The benefits of an embedded risk culture - PI renewal 2012

By Prime Risk Solutions

The past five years has been an extremely difficult period for many in the UK legal profession. Many firms have seen reductions in their fee income and profitability, leading to a review of staffing levels and other costs.

At the same time, the legal services sector is changing '¨fast and the rules and regulations governing it are changing too. The move to outcomes-focused regulation (OFR), the introduction of COLPs and COFAs, and the allowing of alternative business structures (ABS) has created opportunities, but also many concerns.

A risk-based regulatory framework

The SRA Code of Conduct 2011 has brought forth ten principles. Most of these behaviours were in the previous code (uphold the rule of law and the proper administration of justice, act with integrity, do not allow your independence to be compromised, act in the best interests of each client, and so on), but there are also new ones.

Principle 7 deals with your duty to deal with the regulator, to comply with your legal and regulatory obligations and to deal with your regulators and ombudsmen in an open, timely and cooperative manner. This includes the COLP’s and COFA’s duties to notify material breaches of the code to the SRA. '¨What constitutes ‘material’ is still testing the minds of most nominated COLPs and COFAs. We wait to see in practice what the SRA regards as ‘material’ and ‘non-material’ breaches.

It is Principle 8 that I want to spend some time discussing. Principle 8 stipulates that you “run your business or carry '¨out your role in the business effectively and in accordance '¨with proper governance and sound financial and risk management principles”.

I have spent many years presenting risk management training sessions to law firms. In my experience, fee earners and staff are not fully aware of what constitutes proper and sound governance or how to comply with financial and risk management principles.

Culture eats strategy for breakfast

In a recent survey, 58 per cent of board members said their employees had little or no understanding of risk exposure. '¨The survey also suggested that although ‘tone at the top’ '¨is important, many staff take the lead from their immediate '¨line manager.

These findings show that there is work to be done not just in law firms, but throughout the professional services sector. There is a need to create a greater understanding of risk culture, transforming and improving risk awareness of staff. A process of education and training must take place to ensure staff are made aware of the operational and regulatory risks facing both the firm and them as individuals.

We hear much about the culture of firms. Often in merger discussions, we hear that two firms did not end up proceeding because of a clash of cultures. We also hear insurers referring to a firm’s good or bad risk culture. Culture is important, but what actually constitutes culture?

Culture is about a shared or collective way of thinking '¨and doing things. Can a firm really possess ‘one culture’? I would suggest that, if you are a sole practitioner, you can have ‘one culture’, but as staff numbers increase, it becomes far more difficult.

As firms get larger and more diverse, their culture becomes more of a notional construct; a representation of everyone’s individual values, experiences, attitudes and behaviour. Although many individuals fit within the collective culture, we know that wherever there are human beings there will be exceptions. It is these exceptions that sometimes cause problems that ultimately involve a firm’s insurers.

Most insurers underwriting solicitors’ professional indemnity insurance (PII) want to understand a firm’s approach to managing risks and the risk culture they have. I often hear questions regarding a client’s risk culture, but what actually demonstrates a risk-aware culture to insurers? Every firm takes risks; it is inherent to practising law. What insurers want to know is how you understand risks, manage them and communicate them.
Over many years, I have collated the key areas of concern from leading insurers. They are as follows:'¨
• all firms should have exceptional risk management but they don’t (this shows up in their claims experience);

• senior responsibility and authority for risk;

• risk identification and action plans for managing, monitoring performance and demonstrating continuous improvement;

• overseas offices – demonstrating control and communication; and

• mavericks/rainmakers are considered exempt from risk controls – how are they managed?

In addition, they want to see from all firms:

• controlled business management practices;

• how different cultures are managed following mergers or acquisitions;

• sufficient resources for risk management and compliance separate from fee earning;

• clear management responsibility;

• consistent procedures/contract terms/case management approaches;

• details of the controls on what work is done and client selection procedures; and

• training and development plans – not just on areas of law, but also on client service and risk management.

But how do you go about promoting and maintaining a firmwide risk aware culture?

In my opinion, the best way is by focusing on the acronym LILAC. LILAC was established by the Heath and Safety Executive and was a way of demonstrating what is required to embed a risk aware culture. LILAC stands for leadership, involvement, learning, accountability and communication.
Although intended originally for the railway industry following a number of rail disasters, it is also a very useful guide for any professional service firm.

Leadership: As mentioned earlier, although tone at the top is very important, the risk message (culture) needs to be reinforced at every level of supervision. People take their lead from their supervisor and it is important that supervisors are trained to understand Principle 8.

Involvement: Everyone needs to be aware of risk issues that come to light and should be encouraged to notify any concerns promptly to the right people. In effect, everyone is a risk manager.

Learning: Proper training needs to be given that translates into knowledge. Information alone is not knowledge and, with proper training, key risk attitudes and behaviours can be encouraged and compliance improved.

Accountability: Although a no-blame culture should be encouraged, it is important that everyone knows at what point they become individually responsible. Everyone needs to know they are accountable for their actions. Principle 8 is clear that individuals “must perform [their] role in accordance with…. good risk management principles”.

Communication: A well-run firm has excellent communication channels – upwards, downwards and sideways!

In many ways, addressing the issues above and demonstrating them to insurers improves your chances of obtaining the best insurance terms available at renewal.

PII renewal: 1 October 2012

Early indicators are pointing to a general improvement of rates for the PII renewals in October 2012. With improvements in the assigned risk pool structure and the risks of the boom years receding into the past, this is exactly the time new insurers will look to enter the solicitors’ PII market – insurers with good security ratings.

This increased competition will lead to more competitive premiums. Existing insurers will have to respond to this threat and we are therefore expecting rate improvements for a number of firms.

Although insurers’ rates are driven by mathematical evaluation, individual underwriters have discretion to change pricing based on how they feel about the risk. This can have an impact on the premium offered. So, how should your firm maximise the effectiveness of the renewal process?

You must ensure that your firm is presented in a professional manner. Your broker should be able to advise you on what information to provide. Please make sure that your broker has the right expertise to advise you. In reality, there are only a small number of market leaders, although many profess to be.

Providing a concise and professional submission should be a team effort with your broker. Focusing on areas of current concern to insurers seems sensible. One area that will continue to be under the microscope this year will be a firm’s conveyancing exposure. Do not assume anything in this area. Make sure you obtain the right advice and ensure you provide the information required in a way that helps insurers to offer the lowest premium possible.

The most common mistakes identified by insurers are:

• flooding the market for quotes;

• using the wrong broker;

• providing copies of procedure manuals (when a summary of key risk activities is preferred);

• not providing a complete and accurate claims history;

• not explaining why claims have occurred and what lessons have been learned to avoid recurrence; and

• not demonstrating the firm’s risk culture.
These issues of course vary, depending on the size of the firm and the profile of work done. Ensuring that you have access to all available insurer options and obtaining truly independent advice is a priority.

Establish a plan for how you approach the insurance market and have clear objectives. The better the planning, the more likely it is that you will end up with a positive outcome.

It is important that your broker and, in particular, the person actually negotiating with insurers has knowledge of your firm and the expertise to ensure you have the best chance to secure the desired result.

'¨Colin Taylor is a director and head of risk management services at specialist PII broker Prime Risk Solutions, the consulting division of Prime Professions.

He can be contacted on: '¨Tel: 0207 173 2137

Email: ctaylor@primeprofessions.co.uk