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by Alistair Sim

Suggested ways of benchmarking and assessing a firm's risk management performance

The Journal, April 2005, page 30

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All businesses are understandably interested in their financial performance – turnover, growth in turnover and profit margins. Periodically, there are indicators published in the pages of this Journal based on surveys of the profession – for example, the Cost of Time Survey.

In an ideal world, there would be a convenient method of benchmarking your own firm’s performance according to a wider range of factors:

• the value of written off work in progress, fees or outlays
• staff retention
• client retention
• client satisfaction
• risk management performance.

Case study

Consider the position of the firm featured in last month’s column. To recap, a medium sized firm had never previously had a claims or complaints problem. This situation had prevailed for several years without the partners adopting any specific risk management programme. Over a relatively short period and for no immediately obvious reason, the firm’s Master Policy record deteriorated and, for the first time in years, partners found themselves regularly discussing client complaints at partners’ meetings. That prompted the partners to develop a plan to address the situation.

As part of the risk improvement action plan, some additional risk controls in the form of systems, procedures and disciplines were agreed to be appropriate. This included a more thorough and consistent approach to terms of engagement (and non-engagement) to ensure clarity about who the firm is acting for and about its responsibilities. The firm also introduced a risk management training programme in order to alert colleagues to potential risk areas.

The majority of the partners did not regard this as a one-off exercise. They had been persuaded that effective risk management was an ongoing process of assessing areas of risk, learning from claims, complaints and “near misses”; enhancement of risk controls and continuing training.

However, a year on from the decisive meeting at which the risk improvement plan had been initiated, the partners were keen to know whether effective, measurable progress had been made. One of the partners, who had been resistant to a number of the risk improvement initiatives, demanded that the risk management partner demonstrate that the time and effort had been worthwhile.

A higher priority

The risk management partner highlighted a number of indicators of improvement in the firm’s risk profile:

• Risk management had been on the agenda at each of the last 12 monthly partners’ meetings – in the past, the subject had featured only rarely.
• There had been one or two precautionary Master Policy intimations over the course of the last year and one definite claim. The risk management partner demonstrated that a thorough analysis of underlying causes and contributory factors had been undertaken for each of these matters and an action plan devised and implemented. The same process had been gone through for service complaints and “near misses”.
• Members of staff, including support staff, regularly referred to risk management and made suggestions for improvements, ranging from changes to the firm’s diary systems and the way messages were passed on, to the way deeds sent for registration should be logged out and back in, to how style and proforma documents were updated on the IT network.
• Internal training sessions, even on technical subjects, now featured discussion on areas of risk for the firm and practical methods of minimising those risks.
• The firm now had a risk management manual which had impressed the newly qualified assistant who joined the firm over two months earlier – she had found this very useful.
• The risk management partner now had a risk management training plan that he kept updated, in consultation with the staff partner, to record the risk management training that they assessed to be appropriate for each member of the firm’s personnel according to level of experience and area of practice/management responsibility. This planned approach ensured that training was scheduled and actually took place. It meant that there was a very high level of risk awareness throughout the firm.
• As a guide to the level of improvement, the risk management partner had completed a risk management questionnaire: although a self-assessment and not particularly scientific, the risk management partner believed the firm would score between 85% and 90%. A year ago, on the same basis, the firm rated no higher than 50% (see previous issues of this column on the subject of self-assessment – January 2000, April 2000, June 2002 and September 2004).

Even the doubting partner conceded that his colleague had achieved a great deal in the space of the last 12 months. Nevertheless, he still insisted that there ought to be tangible evidence of the impact of all of this. The risk management partner explained why it is somewhat simplistic to suggest that claims and complaints experience and Master Policy premium levels can provide immediate and authoritative proof of the effectiveness of risk management.

Number of claims?

The nature of legal work is such that a claim arising today might have resulted from an error or omission years ago. For example, a number of commercial leasing-related matters have been intimated in the course of recent months which resulted from work undertaken for landlords or tenants many years earlier.

The firm’s systems and procedures may well have changed between the date of the alleged error or omission and the later date when, on account of a problem resulting from a rent review or a tenant’s default, a loss is suffered and a claim intimated.

As a result of changes in personnel doing the work or in active risk management, the particular error or omission might be far less likely to occur today. Alternatively, the firm may no longer undertake commercial leasing work and the particular error or omission simply could not now occur. A claim on the firm’s current record arising out of work done several years earlier provides little insight into the firm’s current risk profile.

Subject to these limitations, the number of intimations on the practice’s rolling five year record is still worth comparing on a periodic basis, at the end of each insurance year for instance.

Number of complaints?

As with claims, the same strengths and weaknesses could be said to apply to the number of complaints as a measure of effectiveness of risk management. However, complaints tend to surface closer in time to the alleged deficiency in service. The relative numbers of complaints over the course of comparative reference periods may therefore provide a more accurate barometer of the effectiveness of the firm’s risk management than the practice’s claims record.

Master Policy rating

The Society’s premium discount and loading arrangements provide for premium differentials between practices according to their claims records. These arrangements allow practices to benefit from low claim premium discount if they have claims-free or low-claims Master Policy records. Again, this is not a definitive measure of the effectiveness of the practice’s risk management but it can at least provide some broad indication.

If the practice has very effective risk management procedures, that can have a significant impact on its risk profile. For example, effective diary systems (incorporating countdown warnings) in combination with escalation procedures and effective client engagement arrangements ought to ensure that the risk of time bar claims is minimised, if not eliminated. Improving the firm’s risk profile in this way ought to be reflected in the firm’s claims record and that is likely to make a material difference to the level of the firm’s Master Policy premiums.

If a practice’s risk management is less effective, this can result in a poorer claims record and there is provision for the level of premium discount to be reduced or for the practice to incur a premium loading. The loading may be as high as 250% if the practice has a high “loss ratio”. If this is combined with a high frequency of Master Policy claims intimations, the firm’s loading may be increased up to 275%.

A year on year comparison of the level of the practice’s own premium discounts or loadings may reveal a trend, whether improving or deteriorating, in the practice’s risk management performance.

Benchmarking review

Marsh will be issuing to each practice a review of its own Master Policy rating position.  The aim is to demonstrate the correlation between risk management and the financial impact of the Society’s discount and loading arrangements. The additional financial impact of losing clients and wasted fee earning time involved in dealing with disputes all adds up to a clear incentive for implementing effective risk controls.

How well is your practice doing?

If your renewal premiums have included the maximum level of premium loading, that tends to suggest that there may be scope for improving the effectiveness of the practice’s risk management. If not already done, a thorough analysis of underlying causes and contributory factors should be undertaken for each of the matters on the firm’s Master Policy record and a preventive action plan devised and implemented for each. Systems should be reviewed as a matter of priority and thereafter monitored on a regular basis.

If, on the other hand, your premiums have included the maximum level of low claim discount, that tends to indicate that the practice’s risk management is proving effective. Bear in mind though that, as mentioned above, risk management should be seen as an ongoing process of enhancement and systems should be kept under regular review to ensure that the practice’s risk management remains as effective as possible.

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) Practice at Marsh, the world’s leading risk and insurance services firm. To contact Alistair, email: alistair.j.sim@marsh.com.

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

Marsh Ltd is authorised and regulated by the Financial Services Authority.

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