Accountant insurance set to surge on Enron claims

PUBLISHED : Monday, 21 January, 2002, 12:00am
UPDATED : Monday, 21 January, 2002, 12:00am

Leading accounting firms, already paying high premiums for professional indemnity, can expect insurance bills to soar following the collapse of United States energy giant Enron, industry experts warn.

'The Enron case adds fuel to an already tough market situation,' said Legislative Councillor Bernard Charnwut Chan, who represents the insurance sector.

Insurers were expected to raise the cost of professional indemnity insurance after reports that Arthur Andersen - the accounting firm that was both an auditor and consultant to Enron - could face costly lawsuits from Enron creditors and investors for failing to detect the true financial state of the company.

Arthur Andersen has admitted destroying Enron documents and wiping computer files after learning the US Government was investigating Enron.

'Andersen's payout [for legal claims] would be so enormous that the insurance would probably not be enough to cover it,' an executive at a rival firm said.

'Enron's case is not only affecting Arthur Andersen's American unit, but impacting on the entire group all over the world. Enron had subsidiaries all over the world that were audited by [Arthur Andersen] local offices,' he said.

Mr Chan said if Arthur Anderson was dragged through the courts and accrued huge legal bills it would have a knock-on effect, with professional indemnity insurance becoming prohibitively expensive for all auditors.

'If the claims from Arthur Andersen [relating to the Enron case] are outrageous, it definitely will have a strong impact on insurance prices,' Mr Chan said.

He said the cost of professional indemnity insurance had been high since last year when insurance companies suffered some enormous payouts, many relating to the collapse of companies in the Asian financial crisis.

'This is already a sellers' market. There are not many players offering quotes,' Mr Chan said.

Hong Kong's Hospital Authority has reported that it suffered a 30 per cent increase in premiums last year for professional indemnity insurance to cover medical staff.

Lawyers too are finding the cost of professional insurance more expensive, their mandatory cover rising 160 per cent last year.

The cost of fidelity insurance, compulsory for brokers, rose 150 per cent last year, according to the Hong Kong Stockbrokers Association.

Insurance premiums have increased drastically for airlines following the September 11 terrorist attacks and the huge claims following the tragedy.

Mr Chan said the increase in premiums reflected the fact that professionals were more at risk of being sued.

A partner at a global accounting firm in Hong Kong said the increase in premiums for accountants could be as high as between 10 per cent to 20 per cent.

He said one of the leading firms recently had struggled to renew its policy because the insurer was demanding sharply higher premiums.

Analysts said they expected accounting firms to pass on costs to customers through higher auditing fees.

According to industry sources, the leading accounting firms have been paying billions of US dollars a year for insurance to protect partners from legal claims.