An Overview
At roughly the same point last year we reported that the market for Solicitors’ PII was the best it had been for many years, possibly ever.
We have even more good news: The market is at least as competitive now as it was a year ago, in some instances even more so. This means that many firms will find themselves in a position where they are able to choose from a range of quotations provided by multiple insurers, all at rates that are similar to or lower than at the last renewal. These options are also likely to include a range of policy terms, from the usual 12 months through to 24 months in some instances.
Needless to say, individual circumstances are still a significant factor in determining what law firms can expect from insurers. Firms that conduct higher risk work, have experienced large or frequent claims, have had disciplinary issues or that present a combination of these factors may still find a more limited appetite for their business and may benefit less from what is otherwise a highly competitive marketplace with ample insurer capacity. Even so, such firms are still likely to find underwriters more receptive than they were a few years ago and the impact of these more negative factors should be reduced as a result.
Insurer rates are typically circa 1% to 5% of a firm’s fee income although individual circumstances such as the ones described above can result in some firms paying 10% or more. However, the overall trend is downwards and insurer rate reductions will normally more than offset moderate growth in fee income.
In 2017 we reported that unrated insurers had “all but departed”. At the point of writing this article we can confirm that there are currently no unrated insurers offering primary cover to Solicitors. Whilst the pricing gulf between rated and unrated insurers had reduced significantly in recent years, firms can now take comfort in the knowledge that any primary insurance quotations they receive will have been provided by a rated insurer. Of course a rating does not necessarily guarantee stability, as the near collapse of AIG in 2008 demonstrated. Ratings do however provide at least some clarity as to the financial stability of an insurer and their ability to repay claims. It is also worthwhile considering how long each insurer has provided primary cover to Solicitors, especially following the recent influx of new insurer capacity. Insurers that have real longevity in the market and that carry a stronger Standard & Poor’s rating are likely to be more appealing as a long-term “home” for your practice’s PII, although they may charge a little more for the pleasure.
Factors That May Affect Market Conditions In the Near Future
SRA Consultation Regarding Professional Indemnity Insurance Minimum Terms
In 2014 the SRA proposed various amendments to the PII minimum terms and conditions (“MTCs”). These included a reduction in the minimum cover required by a firm from £2m/£3m (depending on the type of business) to £500,000. The Law Society opposed these changes, as did the insurance industry, and ultimately the plans were refused by the regulatory oversight body, the Legal Services Board.
Undeterred, the SRA is making a fresh attempt to significantly amend the MTCs, citing research published towards the end of 2016 which it says demonstrates that current insurance requirements are disproportionate to the actual risk that most law firms find themselves exposed to. The data covers the period 2004 – 14 and shows that one in five claims resulted in an indemnity payment, and that 98% were settled for less than £580,000.
Like many in the insurance industry, The Professional Indemnity Company continues to question the supposed benefits of a reduction in the minimum cover. Whilst it is acknowledged that in part the SRA’s intention is to reduce the financial burden that PII represents to law firms, especially smaller practices, a reduction in the minimum cover requirements could be counter-productive and would not necessarily result in a significant reduction in premiums. The SRA’s data broadly correlates with insurers’ experiences i.e. that most claims settle at below £580,000. This presents us with an obvious question: if it is accepted that in most instances insurers are faced with individual claims of circa £500,000 or less, how does a firm taking the lower limit of indemnity represent a significantly reduced risk to insurers? A firm with the lower limit of £500,000 presents an almost identical risk to the insurer as one that carries a limit of £2m or £3m. In light of this, why would insurers offer any meaningful reduction in premium for firms taking the lower limit? From our own discussions with insurers the consensus appears to be that a reduction in cover might potentially result in a premium discount of between 0% and 10%. Putting premiums to one side, it is also worth considering the position a firm would be in if it took the lower limit of £500,000 but was then unfortunate enough to experience a claim that exceeded that limit. Based on the SRA’s own analysis, one in fifty claims would fall into that category and could potentially leave firms with a partially uninsured loss. It is worth bearing in mind that any premium saving would be in exchange for a reduction in cover of 75% or more.
Fraud Claims
Whilst the overall number of claims experienced by Solicitors appears to have reduced in recent years, claims related to fraud remain a concern for insurers. Claims of this type can be large, often disproportionate to the size of the law firms targeted. Fraudsters have become increasingly inventive and their techniques have moved on from the ‘Friday afternoon scams’ experienced a few years ago. This makes it even more difficult for Insurers to factor-in the potential for fraud when calculating their rates for Solicitors. The Professional Indemnity Company has assisted numerous firms that have been the victim of such scenarios and has witnessed first-hand the impact they have had on the firms’ morale and on their subsequent PII premiums.
Law firms that can demonstrate a pro-active approach to risk management and that use robust internal processes in conjunction with products provided by specialist third parties are likely to give insurers greater comfort. They are also less likely to be targeted by and become the victim of such fraud.
This is an area that changes frequently. Firms are encouraged to stay abreast of fraud-related trends and to be receptive to process and system-related changes in order to stay one step ahead of scammers.
Brexit
Although Article 50 was triggered over a year ago, the nature of the UK’s departure from the European Union is still to be decided. Whilst the Bank of England and various financial forecasters have speculated as to the potential effects on the UK economy, until Brexit actually happens (in whatever format that occurs), it is impossible to state with any certainty what the ramifications will be. The most recent recession presented various factors which led to a significant increase in the number of claims experienced by Solicitors and other professionals. Whilst it is difficult to predict the impact the realisation of Brexit will have on claims and the insurers themselves it does have the potential to become a factor in the PII market over the coming years, possibly even by the time of your firm’s next renewal.
Market Summary
The current “soft” market represents a great opportunity for most firms to achieve quality cover at a reasonable cost, potentially with an extended policy term. At The Professional Indemnity Company we have exceptionally wide market access and in most circumstances can provide firms with an array of competitive options including permutations to suit the individual needs of your practice. If you have any questions related to this market overview or if you would like us to provide your firm with quotations, please contact us on: 0333 733 5192 or by email: info@thepicompany.co.uk
The Professional Indemnity Company is a specialist, independent professional indemnity insurance broker.
Our Solicitor Division was set-up by Solicitors, for Solicitors and our Account Managers have over 50 years’ experience in securing quality, competitive cover for law firms.