Hello , i have the 1) questions to do. How could i explain it in a clearer way.

In this project, we study the Professional Indemnity insurance division of AXA. We aim to 1) explain why this division is negatively affecting the profitability;

Brief context: AXA is one of the largest insurers in the world, a multinational general insurance company, providing insurance to over 100 countries. The company provides both personal and commercial insurance and a range of classes of business under each of these sectors. The Lloyds Glossary provides the following definition for a class of business: A description of a type of insurance or reinsurance business based on the risks being covered. The Lloyd's market underwrites eight main classes of insurance and reinsurance business: reinsurance, property, casualty, marine, energy, motor, aviation and life. Each of these main classes consist of a number of sub-classes. (Lloyds)

This assignment will be focused on the Liability class of business (often also referred to as casualty). All the products within this class of business are built around providing cover for claims made against an insured by third parties, but this assignment will specifically focus on professional indemnity insurance, a sub-class of Liability, designed to protect an individual or business against claims made by clients for loss or damage due to negligent advice or services. (Know-Insurance, 2013)

The UK Professional Indemnity division for AXA has a gross written premium of 85 million, consisting of income from both the London City and regional accounts. This income is derived from various forms of distribution, mainly being binders, a wide broker network and online systems.

Explanation of one significant insurance product that is negatively affecting the profitability of a class of business

It has already been determined that all the products offered by the Professional Indemnity (PI) division are aimed at offering cover for claims against professionals for any loss caused to third parties as a result of their negligent advice or omission. AXA splits the PI offering into four main categories: accountants, engineers, property professions and miscellaneous (including technology and media). Of these four

categories, accountants PI is the main product offering, and AXA are considered one of the leading insurers in the market and approved by both the Institute of Chartered Accountants in England and Wales (ICAEW) and the Association of Chartered Certified Accountants (ACCA). Both set minimum standards for PI cover for their members. For instance, The ICAEW requires a minimum limit of PI:

Two and a half times the gross fee income of the firm for its last financial year, subject to: a minimum of 100,000; and maximum of 1.5 million. (Hammond PI)

The ACCA also has similar minimums reflective of various bands of fee income. AXA aims to offer accountants the minimum limits required by their regulatory bodies and ensure that the PI product offered is compliant with all minimum requirements in terms of the cover offered.

Although this product is generally profitable, there is an area of concern which appears to be negatively affecting the account. Policies offered to accountants who are currently, or who have historically, given tax mitigation advice to their clients are suffering from an influx of notifications and paid claims. When an accountant has offered this service, they have advised or introduced their clients to invest money into schemes which have the main objective of avoiding payment of tax to the Government.

In 2014 the Government introduced accelerated payment notices (APNs), which required the recipient to pay the relevant tax back to the government within 90 days. The HMRC began to heavily investigate the use of tax mitigation schemes and where these were deemed to be set up or entered for the purpose of avoiding tax, an APN would be issued. The taxman's crackdown on avoidance schemes led to the HMRC Counter Avoidance Directorate collecting 886m from people who had tried to avoid tax by signing up to schemes.(The Telegraph, 2016)

As a result of this sudden crack down on tax schemes, those who had invested and were facing paying the notices turned to their accountants for compensation stating that they were negligently advised to enter such schemes. As a result, several notifications have fallen under the PI policies. The accountants themselves will often also face direct fines from the Government themselves, although this would not be covered under the PI policy (The Independent, 2106).

In 2011 there were only three notifications to AXA falling under this category. The above actions of the HMRC, led to a sharp increase in notifications falling under this category.

For the year 2014 when the HMRC really focused their attention on this area, there was a total of 47 claims made during this accident year. The total incurred costs of such claims currently sits at just over 13.5 million (the total between 2005-2017) and just over 6 million has been paid out. This demonstrates that there is a problem of several notifications as a result of this type of claim being under the lime light which has led to vast amount of legal costs being paid out, so even where there may not be a resultant claim paid against the Insured, the cost of defending such actions is affecting the industry immensely.

This is a generic problem across the PI market, but each Insurer has been affected differently and responded in different ways. AXA remains in the market offering of PI for accountants so inevitably has some of these risks within the account, which has led to large claims and several notifications. However, with careful amendments to underwriting strategy, AXA is aiming to reduce exposure within this area and manage the remaining risk.

Underwriting acceptance criteria for this Product

To ensure that AXA are not too heavily exposed from claims arising from tax mitigation, certain underwriting criteria have been set for the PI product offered to accountants undertaking such work.

New proposal forms have been introduced with additional questionnaires for those accountants performing such work. From the additional questionnaire underwriters can establish the extent to which the risk is exposed to tax mitigation claims.

Set criteria has been established and written into guidelines as to which risks should be declined on this basis.

For instance, where the accountant was promoting schemes themselves or designing such schemes and directly entering their clients, this would be an automatic declinature.

If, however, they were only introducing the client to other promoters of the scheme,

this provides another step in the chain putting them further away from claims and therefore may be considered.

Where the accountant has only undertaken introduction, further questions will be asked as to the number of schemes that they introduced, the number of clients, the monetary value the clients invested and what schemes were they involved with.

AXA has set criteria according to the number of schemes that are acceptable and the maximum number of clients and values placed into schemes because if several clients are placed into the scheme this could potentially amount in block notifications. If the overall amount is too high or a single amount invested from any one client too high, then this would fall outside AXA s appetite.

As underwriters, we would also be looking at the contracts in place between the accountant their client and the promoter. Questions should be considered such as whether there is third party advice (i.e. that of the promoter is specifically excluded within the contracts between the accountant and their clients), is there a separate contract in place between the promoter and the client and does the accountant specifically limit their liability? All of these measures would make an accountant undertaking such work more attractive. Specific guidelines have also been issued by the ICAEW (ICAEW, 2016) to help accountants draw up terms of engagement for contracts between themselves, promoters and clients. Where accountants have followed such advice, this will also be looked upon favourably by AXA.

These steps would form part of the Insureds risk management. The additional questionnaire will ask further risk management questions which the underwriters of AXA will then analyse and assign points to for each positive step taken, according to the underwriting guidelines set. Where the points allocated fall below a threshold, the risk should then be declined.

Only those over the threshold become writable and the rate will be dependent on where they fit within the scale.

Another step taken within the underwriting criteria is to ensure that certain endorsements are added where the product is offered to accountants with tax mitigation exposure. A specific excess endorsement is added so that any work in respect of tax mitigation is subjected to a higher excess and this is also in respect of each and every claimant (as opposed to claim which is usual within PI).

Previous claims would also be considered by underwriters and whether any have amounted from this type of work historically. Where there have been several notifications or claims of this type paid, the risk will be less attractive.

Where a risk falls just outside the guidelines, for instance the amount invested into schemes or the number of schemes introduced falls just above the threshold, an underwriter can choose to refer the risk for discussion among a peer group, including a portfolio manager. This may be particularly important on renewal cases which were previously acceptable under historic guidelines but as a result of amendments made in response to the HMRC actions could potentially be a declinature.

How the underwriting acceptance criteria influences the profitability of this insurance product

The main aim of the revised underwriting acceptance criteria is to ensure that those risks which have historically exposed AXA to tax mitigation claims are no longer within the account, and that an acceptable level of exposure is present.

AXA would be unable to withdraw from this sector completely as they are seen as a lead insurer for accountants and have to maintain this reputation. Instead it has been important to use the expertise required to apply suitable restrictions within the underwriting guidelines which allow us to still accept risks where we are unlikely to have such severe claims and as a result protect the profitability of the account. With carefully selected underwriting, rather than complete withdrawal, we are able to maintain several clients and satisfy brokers needs in placing some difficult risks. In turn brokers should reward us by also keeping the standard, vanilla risks with us also, helping us to maintain profitability across the account.

In requesting an additional proposal form, AXA aims to understand the risk and its exposure: The insurer will need to understand the extent of the advice that has been provided by the accountant particularly at the introduction stage. Did the accountant sit in on the meetings between the client and the scheme promoter/provider? (Bluefin, 2017)

The underwriting criteria set requires clients who have offered tax scheme advice to complete the questionnaire and answer further questions such as the above, so that

we can establish the extent to which the insured were involved in offering tax mitigation advice.

This helps protect the profitability of the account because if the underwriter establishes that the accountant was heavily involved by directly promoting the scheme or attending meetings with the clients to the promoters, or that they have not protected themselves with the relevant terms of engagement, they should be more cautious in considering the risk. Where it appears that the accountant is too heavily involved, in order to protect the profitability of the account, such risk should be declined. If they are written there is a high chance that a claim will be directed at them and is likely to be successful.

In asking further questions about the values and number of the clients, and setting restrictions on what is acceptable, AXA can also control the level of claims that could arise. For instance, the criteria sets limits on the maximum amounts invested per client and overall. This ensures that should a claim be made under the policy it can only reach a certain level and not go beyond this.

The premiums are carefully conducted to take into account the levels of exposure so where there are higher amounts invested and a larger number of schemes or clients, the premium will be significantly increased. In doing so AXA can protect the profitability of the account by gaining more premium, the loss ratios will be improved, particularly if we are able to keep hold of the business for several years and only encounter few claims within those years. With the restrictions in place as above, which aim to reduce the amount of claims exposure, this will also positively affect the loss ratios.

Another measure that was taken in the underwriting criteria was the increased excess in respect of this work and to make the excess each and every claimant. This was a crucial move in protecting the account due to the nature of such claims making them susceptible to block notifications. For example, if a scheme comes under scrutiny from the HMRC, all the clients that the insured introduced to the scheme would be able to take action against the Insured. If the excess was each and every claim, a block notification would be made to meaning that only one excess is applicable for multiple clients as they all fall under the same claim. Making the excess each and every client ensures that every client that is part of the action would have to pay a separate excess, thus protecting AXA as the exposure will only be above that excess for each client. In making the excess higher any claims falling

below this will be met by the insured so AXA are therefore protected up to a set level.

This is one of the reasons why the underwriting criteria caps the value that any one client can invest. In setting the limit on this and increasing the excess to above this amount, if a client tries to claim back the amount they have invested in the schemes as a loss due to negligent advice, this should fall within the excess that the Insured is required to pay out. Any penalties enforced on the clients by the HMRC will also be proportionate to the amount invested AXA are also protecting the level of exposure from penalties that clients could claim back from the Insured.

All these methods to lower the level of exposure will also decrease the amount of claims payable or the value of the claims. In doing so this will protect the profitability of the account.

The key to protecting the profitability of the account is in understanding the risk that is being placed before the underwriters and where claims are likely to arise from and limiting the exposure to such claims. In asking the further questions in the additional questionnaire AXA can fully understand the risk and decline anywhere they see the exposure to be too great and the risk not worth taking. Those which are accepted can be done so with caution, with the relevant terms such as an increased each and every claimant excess applied and a higher premium applied.