Legal firms are facing a Professional Indemnity Insurance (PII) dilemma as the insurance market shifts quickly towards hardening conditions not experienced for many years.
In contrast to recent renewal seasons, April will see a much more difficult landscape for legal firms as the choice of insurers shows signs of shrinking, especially amongst those writing excess layer business.
How to prepare for a hardening market
Submit your proposal form in good time
This enables your broker maximum time to negotiate with the market and is paramount in hardening conditions.
Be clear on the proposal form of your work split
Some insurers will have a threshold on the level of conveyancing exposure they can underwrite, so be clear what your conveyancing risk is.
Do not rely on the proposal form and claims experience as your entire submission to the market
Insurers are focusing on how you manage risk as a firm and what policies and procedures you have in place. Full details of how you manage risk should be included in your submission. Insurers are also keen to know details of your plans for growth and any potential mergers and/or acquisitions.
How you manage risk includes:
Commentary on how the firm is run / managed
Whether there is a management board, strategy Board or business services board and what roles they each perform and the individuals on those boards
How does the risk management department function i.e. how does it monitor, manage and mitigate risk within the firm:
o This could be from a legal and regulatory perspective
o Client requirements perspective
o And even from the perspective of PI Insurers
File opening procedures:
o Know Your Client (KYC)
o Client engagement letters
o AML/ sanctions
o Conflict checks
o Monitor and record fee estimates
Review your claims experience with your broker and insurer
Work with your insurer to agree to close any matters you feel are no longer active. Ensure that your claims experience provides an accurate reflection of your firm.
Meet your Primary Insurer
There is only so much information an insurer can gather from a renewal submission. Allowing your insurer to understand your business better and comprehend how you manage risk will provide a more accurate picture, rather than simple reliance on your proposal form. In these changing times, it is also highly advisable to explore alternative primary markets and ensure you have a backup plan.
Review your Primary Limit
With regards to excess layer rates increasing on layers up to £10million, consideration should be given to asking your broker to look at options for an increased primary limit to alleviate this potential problem area.
What does the future hold for the PII market?
The future remains uncertain. Market conditions in 2019 will be determined by factors such as:
- If claims continue to increase in size this will impact both pricing and insurer appetite for the legal sector.
- If reinsurance rates increase, the knock-on effect will be felt in insurers pricing. January is a key month with a number of insurers renewing their own reinsurance treaties.
- Brexit - it remains to be seen what impact it will have on the insurance market for the legal sector. London Market insurers are having to set up and staff European operations to deal with EU related business, so it is likely that firms will see the effects of this in insurers pricing.
The key to finding your way through a changing market is to present yourself to the market in the best possible way and by working closely with your broker to achieve this.
What is happening now in the England and Wales Solicitors Professional Indemnity Market?
All insurers who are an "authorised insurer" to conduct business in England and Wales can become a participating insurer provided they sign up to meet Solicitors Regulation Authority's (SRA) Minimum Terms and Conditions.
Solicitors Professional Indemnity Insurance is structured on a "layered" basis. The primary layer is the foundation of the cover providing liability limits of up to £3million and there are a number of insurers who are operating in this space. Consequently premium rates have remained stable and in some cases even reduced.
The second layer is called the "excess" layer and offers a solution for legal firms who need to cover an amount of between £3million and £10 million. In this market the number of available insurers has shrunk, due to several large insurers exiting the PII market as a result of some large losses. The laws of supply and demand have forced rates higher which has resulted in significant premium increases for some firms.
For firms who need to purchase cover in excess of £10million, there is also evidence to suggest that rates have started to increase. Insurers are looking to reduce exposure on these layers, meaning more insurers are needed to complete placements. For firms buying cover in excess of £250million there are even suggestions that there may not be available solutions for them. This will undoubtedly lead to significant premium increases.
Another important change is the length of available policies. In the past, insurers were prepared to offer premium discounts to tie in insured firms for a longer period (normally 18 months) but such incentives are no longer being offered. Furthermore it would seem that, particularly in the second (excess) layer market, that surcharges are now being applied to longer policies due to the ongoing uncertainty.
Why have conditions changed?
We have seen evidence of more claims activity above the primary layer and as a result the excess layer market has to pay claims and establish reserves. The frequency of claims is not increasing at any significant rate, however the value of claims certainly has.
In addition to professional indemnity claims, insurers have also been exposed to losses due to natural disasters; such as earthquakes, and hurricanes, and significant losses have also been experienced in the Directors and Officers insurance market.
For insurers writing all classes of business this will impact their overall profitability, causing rates to increase
It is likely that we will see further contraction in the insurance market in the UK as insurers exit both the primary and first excess layer markets.
Views expressed in our blogs are those of the authors and do not necessarily reflect those of the Law Society.
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