Firms are increasingly working overseas exposing themselves to the changing insurance requirements of international markets
Overseas markets are playing an increasing role in the client base of UK consultants as 61% of survey respondents say that a fall in UK government funding is the biggest challenge to their business. At the same time 60% of respondents said that the UK was the most challenging market, up from 48% in 2010. As a result 38% of firms are downsizing certain business areas, 38% are expanding into new geographies and 57% are moving into new sectors of work. Only 33% said they were entering new areas of work in 2010.
“There is a direct correlation between the concerns about the UK and firms expanding into new international markets,” says Marsh senior vice president John Doe. “We are seeing this from a lot of clients where their international base has broadened and people are looking to work in new types of markets.”
New markets of particular interest include the BRIC countries of Brazil, Russia, India and China, along with the Middle East. “In the BRIC countries the economies continue to be reasonably successful. We hear that people are doing very well in areas such as Abu Dhabi, Qatar and Saudi Arabia, despite the problems in Dubai” says Doe.
Entering new markets exposes firms to new risks and in terms of insurance requirements there are some key issues that consultants must be aware of. The biggest of these is a requirement from local clients to have an insurance policy from a local insurer. According to the survey 64% of respondents rely on their global policies to apply in local markets, and only 44% says that they have a broker in the markets in which they are operating.
“We have come across examples where people did not bother issuing a local policy and thought it was something they could bypass - but then find they can’t get their fee paid. This is becoming more and more of a problem now. In the past there may have been some looseness about enforcement, but not any longer. It is being pushed hard,”says Doe.
Consultants are aware of the need to understand the markets in which they operate and those that use Marsh as a broker are able to access MarshConnect, a global real-time database of information that tells people about the requirements for global markets including BRIC and Middle Eastern countries.
“We have more offices internationally than any other broking house. We can arrange for a local policy to be issued either directly or with a reinsurance arrangement to keep costs low,” says Doe. He also points out that overcharging of international firms by local insurers is a potential risk in certain markets. “We rely on the information from our local offices, and find that if you don’t have someone on the ground you can be charged far more than may be appropriate.”
In addition some markets, which are seeking to promote business activity among their local insurance firms are tightening the rules on insurance and in some cases requiring local business licenses to be issued before insurers will issue policies. “Even where people are buying local policies we are finding that the rules in issuing those policies are tighter,” says Marsh managing director Tim Payne.
Worryingly, 65% of survey respondents said that they were not aware of the specific liabilities imposed in most Gulf states where consultants and contracts are exposed to decennial liability. For 10 years after the completion of a building the consultants is jointly liable with the contractor for any collapse or failure. “You might have designed the front door but you don’t know how much you will be liable for. They can proportion it any way they want,” says Payne. “It probably falls out of the scope of the PI policy and many do not seem to be aware of this. There is insurance available that can be added to a PI policy.”
Some consultants think that by removing such clauses from contract agreements they are eliminating their exposure to this risk, but as a legislative requirement it cannot be avoided in this way. “It is in the civil code of that country so you can’t avoid it no matter what it says in the contract. It is a business risk, unless you want to go to the thin band of insurers that would cover it on a declared project by project basis,” says Doe.
Working in new markets often means new clients and even firms with the best risk management can come unstuck. “You can do everything right and still get involved in a problem,” says Doe. One of the risks is that of local institutional bias. “You could find yourself working with an organisation that has a very high profile locally. The country may not even realise it has that bias. This is another risk.”
An issue that the survey highlights in both UK and international markets is an increasing trend for clients to withhold payment. Anecdotal responses to question 22 regarding what is causing disputes include comments such as: “there is a general desire to hold off payment with excuses then seek to cut a deal when enough money is on the table to force us to negotiate,” and “public sector clients have started to seek to withhold or recover fees properly earned for instructed work,”
Marsh says that insurers are seeing more fee disputes. “We have had one underwriter tell us that he has seen a 40% rise in fee disputes and this is probably linked to funding of projects where people are struggling to keep the money and work flowing,” says Doe.
Professional indemity action
In many cases action taken against the client to recover fees can results in a professional indemnity action against the consultant with a much greater value than the fee that was being sought. This means that insurers are keen for consultants to negotiate rather than take legal action and is another reason why insurers are keen to see consultants working with repeat clients.
When it comes to disputes between insurers and the insured, some brokers do offer assistance. Marsh for example has a claims advocacy team consisting of three fully qualified lawyers that will work between the parties to seek a solution. “They can give a higher level of support than you would usually expect from a broker. They are there with a view to keeping both the insured and insurers solicitors out of the game - ramping up costs. They will go straight to the insurer and find a solution and can assist the client in how to structure their approach and the tactics to use in working on the claim,” says Payne.
But on the bright side the survey revealed that litigation threats have fallen compared to 2010 with only 10% reporting increasing threats from the public sector and 18% from the private sector.