Although professional indemnity insurance prices remain very competitive for this October’s renewals, law firms should plan ahead because the forecast is unsettled.
Healthy competition in the solicitors’ professional indemnity insurance (PII) market points again towards a benign renewal season, which means that most law firms are likely to experience a straightforward renewal with their premiums remaining stable.
“We’re in a soft market, which means insurers don’t want to lose premiums,” explains Mark Carver, Partner & Head of UK International Financial Professional Risks at Miller.
These ‘soft market’ conditions are driven by a large amount of insurance capacity in the solicitors PII market, which means insurers need to compete on price to win new business. The result, says Carver, is that: “This is a buyer’s market. I wouldn’t expect lawyers to pay any more in premium for this year’s cover unless their fee income, exposure or claims experience have materially changed.”
As things currently stand, the expectation is that insurers will be offering good deals to law firms whose policies expire on 1 October.
Reputable professional indemnity insurers increasing
The number of large, financially strong companies now looking to insure solicitors’ firms means there is no room left for unrated insurers, which only a few years ago made up a large slice of this market.
“There’s plenty of rated capacity out there,” says Ian Bowler, Head of London Market Professional Indemnity Insurance at Sompo International. “Solicitors have plenty of options available, and it will be relatively easy for well-managed, profitable firms with good claims records to obtain cover with an A-rated insurer.”
Even those solicitors’ firms that in the past found their PII options to be limited would have more insurers to choose from this year, says Carver. “Three or four years ago, a small law firm with more than 25% of its income from conveyancing probably had a choice of, at most, five insurers. This year, it will probably have twice that number.”
The picture’s different for ‘problem risks’
But for those law firms that have suffered claims the situation can be difficult, and they can find their professional indemnity insurance options are more constrained. Others will be unfairly labeled as ‘problem risks’ even though their claims records are not that bad.
“Insurers that are competing aggressively for law firms with clean claims histories will often refuse to renew their policies if they suffer a claim, or will only do so at a much higher premium,” says Charles Hawtin, Head of Client Services at Chancery Pii.
“One firm came to us recently after it was told by its PI insurer that its premium would double because it had had a claim. The truth of the matter was that the claim was relatively minor, and we were able to offer terms at the expiring PII premium.”
If you’re worried, start applying for PII early
Law firms that have suffered claims should begin their search for PI insurance cover well ahead of when their current PI policy expires, says Neil Ross, Head of AXIS Pro Europe. “Most insurers are willing to invest the time to get comfortable with a risk, but that’s only possible if the law firm moves early and is engaged in the process. Professional indemnity insurers want to know a law firm’s story. One loss doesn’t make a pattern, but you need to explain to us why you don’t think it will happen again.”
Ross continues: “Quite often, we see law firms with a chequered claims history presented to us in the last week of September. All we can say is: ‘Why didn’t you come to us earlier?’ If they leave it until the last minute and can’t get PI cover in time, then it can result in them going out of business. Yet that’s a very avoidable risk.”
Bowler agrees, adding: “If those solicitors that have suffered claims can demonstrate those are likely to be one-offs, because they’ve changed their risk management controls and procedures, they should find the process more straightforward – providing they can present the information underwriters require to make a decision.”
Bowler’s advice to law firms is: “Be really careful about which PII broker you choose. Find one that is professional, that understands what information underwriters need to make decisions and which has close relationships with a number of insurers… each insurer has its own strategy and appetite for particular types of work, such as conveyancing, immigration, matrimonial or personal injury.”
Beware PII deals that seem too good to be true
The same storyline has been repeated several times since this market opened up to competition in the early 2000s: some newcomers will offer eye-catchingly attractive deals to entice law firms away from established players in an effort to break into the market.
“The problem is that it can take several years before the insurer realises it hasn’t charged enough to pay for all their claims,” explains Richard Brown, Head of Solicitors PI insurance at Miller. “That’s often the point at which some insurers either pull back or pull out of the market altogether.”
Four insurers in the professional indemnity market have gone out of business in recent years: Enterprise, Lemma, Balva and ERIC. None had an independent financial strength rating – which isn’t a requirement by the Solicitors Regulation Authority (SRA) – but all left law firms either with unpaid claims or scrambling to find new cover to avoid having to close. “This market can be a minefield for unsuspecting buyers,” says Ross.
An PI insurer’s sustainability should be just as much of a factor in a law firm’s decision about which one to choose at renewal time, as price, says Paddy Synnott, an Account Handler at Miller. “The cheapest quote isn’t necessarily the best. And if a quote looks too good to be true then it probably is, which raises the question of whether that insurer might still be around in three or five years’ time.”
Cyber liability insurance
The future PI insurance landscape
Despite the relatively soft market conditions right now, the outlook is clouded by worries about growing social engineering scams, the state of the property market and the overall economy.
There is strong competition, says Sompo’s Bowler, but he says the generally good macroeconomic picture is helping PI insurers. “The state of the economy is critical to claims, and the recent low interest rate means the housing market in the sub-£1 million bracket has been relatively buoyant, which is important for high street solicitors firms that specialise in conveyancing. The strong stock market, which has benefited from a weaker pound, is also good news for big law firms that rely on M&A work.”
But there are signs of a slowdown in the property market, says Bowler. “The main driver for pushing up rates in the medium-to-long-term is a downturn in the property market. In the first quarter, the UK fell from being the fastest growing nation of any advanced economy to the worst performing of the G7 nations, caused by a fall in consumer spending with rising inflation and poor wage growth.
The housing market is now showing signs of slowing, despite ultra-low interest rates. This is attributed to changes in stamp duty and the beginning of the reduction in mortgage interest tax relief for buy-to-let investors. Political uncertainty amid the Brexit vote and recent general election are also having an impact.”
This could cause a rise in conveyancing claims, warns Bowler. But, he adds: “One would hope that lessons have been learned from the last recession by both solicitors firms and lenders alike. Any insurer that is overweight in any particular area may be vulnerable, as their portfolio will lack diversity. A property crash, however, I feel is unlikely.”
Time limit on low PI insurance rates
But a correction in prices is likely to happen sooner or later, says AXIS’s Ross. “I’d say we’re bobbing along at the bottom of the market,” he says. “I can’t see how these conditions can continue for much longer.”
Miller’s Carver agrees, saying: “We’re making the most for our clients of the good deals that are on offer, but I’m not sure for how much longer they will be available. The outlook is negative if you look at the insurers’ claims data for 2004-2014, submitted to the SRA, which show that claims are running ahead of premiums.
This data indicates that a market correction is required for insurers to make a return. Our own research shows that since 2000, the average time that an insurer writes business in this market is just six years. In the small law firms’ sector, of less than five partners, insurers withdraw on average after only four years. That’s proof of how difficult it is for insurers to make money.”
Frauds resulting from fake emails sent by cyber criminals have become “a growing source of claims” and could prove a catalyst to a rise in premiums for law firms, says Ross. “These claims now account for a good proportion of this market’s premium income before all of the other claims that insurers must pay. These losses are unsustainable if they continue at this level, and, as a result, carriers are becoming increasingly selective.”
But, in contrast, Bowler sees this problem as being largely confined to law firms that do large volumes of conveyancing work. “I don’t see this as being a big enough problem to move the market. For rates to move, there needs to be a systemic problem that affects every insurer,” says Bowler.
So despite today’s benign market outlook, the future looks more unsettled, which means that law firms should hope for the best, while planning for the worst. “It’s important for law firms, and their broker, to plan ahead, so they aren’t caught out when the market changes,” says Carver. “They should carefully assess their insurance options now, to ensure they are robust and sustainable enough to see them through what lies ahead. If they do choose to base their decision on price, then be prepared to accept this may be a short-term gain.”