It would be easy to see media coverage of the current Solicitors’ Professional Indemnity Insurance (‘PII’) market and feel more than a little downbeat.
Over the past 3 years we have gone from arguably the softest PII market on record to what is undoubtedly the hardest, meaning that rates, and therefore premiums, have increased significantly whilst insurer appetite and capacity have narrowed.
In addition to increasing their rates, insurers are now, with a few notable exceptions, only offering firms the minimum Limit of Indemnity mandated by the SRA, that being £2m any one claim for Sole Practitioners and Partnerships and £3m any one claim for Limited Companies, LLPs and ABSs.
In addition, the days of being able to secure an 18 or 24 month policy are, for the time being at least, mostly a thing of the past, with only one insurer consistently willing to offer a policy term of greater than 12 months.
To add to the gloom, over the last 3 years we have also seen three key providers – Maven, Omnyy and China Re – exit the market as a result of their backers ceasing to provide further capacity, as well as a huge narrowing of appetite from those insurers that have remained.1
The good news (relatively speaking) is that rate increases do appear to be slowing and there is much discussion within the insurance industry as to whether ‘rate adequacy’ has been achieved. 2
This time last year we were typically advising well-run firms with good claims histories and low levels of high-risk work to expect rate increases of up to 30%. This year we estimate that the same firms are likely to see rate increases of between 10-20%. Whilst this is obviously still less than desirable, the reduced rate of increase could indicate that we are approaching the end of the cycle, hopefully with some added stability on the horizon. 3 & 4
Whilst some articles in respected industry publications appear almost apocalyptic when referencing Solicitors’ PII – leaving well-run firms fearful that they may not receive renewal terms nor be able to obtain alternatives – we are more pragmatic. We anticipate that the vast majority of firms will receive renewal terms from their incumbent insurer and that, dependent upon their claims experience, risk management approach, and overall profile, many will receive at least one further option from an alternative insurer.
There will, of course, always be exceptions and some firms may still find themselves faced with large rate increases and fewer insurer options, especially where they undertake high levels of a work type that is unpopular with insurers, such as conveyancing.
Factors Affecting Market Conditions
The Professional Indemnity Insurance Market as a Whole
Whilst it is true that law firms are currently feeling the effects of a very difficult PII market, it is important to frame this in the context of the PII market as a whole. In most hard market cycles, insurers tend to impose rate adjustments on certain sectors with others unaffected. This has often been the case in respect of law firms, with Solicitors’ PII frequently singled-out whilst other professions enjoy comparatively low rates. The current market is markedly different with the majority of sectors experiencing conditions which have led to insurers paying out – or setting aside money as required by regulation – more in claims than has been coming in from premiums.
Lloyds of London, which as well as being the world’s most prominent insurance market, acts as a barometer for the market as a whole, has suffered losses ranging from £900m to £2bn in 3 of the past 4 years.
Professional Indemnity, as well as its “financial lines” relations, Cyber Risk and Directors & Officers Liability, have been some of the worst performing areas for insurers, with Grenfell alone leading to millions being set aside for potential cladding and fire safety claims against architects, engineers and other construction professionals’ PII policies. Similarly, accountants have seen an increase in claims related to tax work and IFAs are seeing their rates increase substantially due to defined benefits pension claims.5 & 6
Even the humble insurance broker is not immune to rate increases with the profession experiencing some of the steepest increases of any sector.
Whilst these examples do not directly relate to Solicitors PII, they contribute to the current difficult trading environment by adding further pressure on underwriters. They also demonstrate the sheer breadth of the issue currently faced by all professionals regardless of sector.
Whilst the frequency of claims experienced by PII insurers has risen over the past few years, claims related to fraud remain of particular concern. Claims of this type can be large, often disproportionate to the size of the law firms targeted. Fraudsters have also 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 – often 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.
As you will appreciate, 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. You may even find that, at renewal, you receive PII quotations from insurers that are subject to the instigation of new, improved fraud-prevention measures by your firm.
Cyber Risk Cover
As you may be aware, there is currently an ongoing consultation between the SRA and the Participating Insurers which relates to the extent to which Cyber Risk is covered under the Minimum Terms & Conditions (‘MTCs’) wording. Whilst we cannot predict the outcome with any certainty, it is likely that coverage will either be specifically written into the policy, or specifically excluded. Cover is currently provided on a “silent” basis, meaning that as it falls broadly under the policy wording and is not specifically excluded, it is likely to therefore fall within the cover provided under the MTCs. At least one prominent insurer has already taken the step of specifically excluding claims arising from cyber breaches as of the start of 2021. We expect to receive further clarity on this matter during the 2nd half of 2021. 7
The Professional Indemnity Company would always recommend that firms that wish to benefit from cyber risk cover purchase a stand-alone Cyber Risk policy. Such policies, whilst varied in nature, are specifically designed to provide broader coverage than that afforded incidentally under a Solicitors’ PII policy and we can happily assist in securing a range of options for your practice.
Personal Guarantees and Run-Off
As many law firms will already know, at least two insurers now require Directors/Partners to give Personal Guarantees (‘PGs’) before incepting cover. The PGs are given to ensure that recourse is available should a firm fail to meet its future payment obligations, such as run-off premiums, unpaid excesses and the like.
Whilst the concept of giving a PG may come as a shock to some policyholders, the insurers in question feel strongly that they need additional protection to ensure that, as they are contractually required to provide 6 years’ run-off cover to firms that cease trading for any reason, they are in as strong a position as possible to receive the agreed premium(s) for the cover they are obligated to provide.
This has been the subject of ongoing correspondence between the Participating Insurers and the SRA with a significant number of insurers of the opinion that some form of provision should be in place in the event that premiums cannot be met. 8
As with the Cyber Risk consultation, this is an ongoing matter, and as yet no resolution has been reached.
The Covid-19 Pandemic
Like the virus’s impact on humans, the business-related effects of Covid-19 vary hugely from firm to firm. Many practices have suffered significantly as a result of the pandemic but others have continued to trade profitably or even experienced a sharp increase in fee income as a direct result. Regardless of how Covid-19 has affected your bottom-line, the changes to daily business interaction, like staff working from home en masse, affect your firm’s overall risk profile.
A proactive approach to risk management has become a necessity, with firms frequently now being asked to demonstrate that they have adaptable, solid approaches to rapidly evolving working environments and the risks that they present.
Many insurers now require the completion of a ‘Covid-19 Questionnaire’ before they will provide quotations and you may now find that you are required to field a number of questions that relate to the pandemic and its impact on your firm. As with the hard market itself, Covid-related questions are now being asked of all professionals regardless of sector, not just Solicitors.
As mentioned in the Fraud section of this article, cyber criminals have a knack of always being at least one step ahead of cyber security, and it is therefore essential that firms protect themselves diligently. As a minimum, firms should ensure that their employees are properly trained in risk awareness and that Two-Factor Authentication and the usage of a Virtual Private Network (‘VPN’) are the norm when working remotely.
As has been stated above, we acknowledge that the market is currently in its most challenging phase for many, many years. However, as with all other areas of the insurance market, this is cyclical, and well-run firms will always be in a strong position to navigate the market successfully. The key is having a realistic target of what constitutes success.
One thing the hard market has demonstrated is the benefit of retaining a broker that specialises in your area of business and that has broad insurer access. At The Professional Indemnity Company we have exceptionally wide market access and are well-placed to provide firms with multiple competitive insurer options.
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: email@example.com