Cover renewal season will highlight clear water between the big fish and minnows
5 September 2011 | By Katy Dowell
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The split between the top and bottom of the profession is nowhere more evident than in the solicitors’ professional indemnity insurance (PII) market.
As this year’s renewal deadline of 1 October creeps closer, those sitting comfortably within the top 100 can expect rates to remain flat, while those languishing towards the bottom of the sector will be hit once more with rate hikes of up to 10 per cent.
This comes despite individual claims of more than £100m each being launched against Linklaters and Freshfields Bruckhaus Derringer since the start of the year. In the past such claims may have triggered a hardening of rates for solicitors’ PII.
In February Linklaters was hit with a e135m (£115m) professional negligence claim from Credit Suisse over advice it provided with regard to a deal with Italian food giant Parmalat back in 2001 (The Lawyer, 14 February).
This came less than a year after the Court of Appeal found the firm liable for a $55m (£37m) negligence claim brought against it by telecoms company Levicom. That case settled behind closed doors.
Freshfields, meanwhile, instructed heavyweight One Essex Court silk Lawrence Rabinowitz QC to defend a £140m claim being brought against it by London Underground (LUL) over advice it provided on LUL’s PPP with the now defunct Metronet (The Lawyer, 25 July).
Typically, when such claims are pursued against firms it is their insurers that organise the defence team and pick up the tab. For some firms this apparent dent in their risk profiles can lead to an increase in premium rates.
According to insurance sources, such a hike is unlikely to be applied to magic circle firms that are facing claims because these are perceived by under-writers to be one-offs rather than a reflection of the firms’ risk profiles.
Beachcroft partner Trevor Chamberlain says: “The market as a whole is still relatively soft. A couple of large claims will not be enough to push rates up.”
For those with lower turnovers and fewer people the outlook is less rosy, however.
Mike Perry, a partner at insurance broker JLT, comments: “The solicitors’ PII market’s split into two halves. The large international firms are treated in one way and [the high street firms] in a different way.”
Compulsory insurance is widely considered to be the third largest overhead for firms behind property and people. For LLPs the compulsory level of cover is £3m, which costs a larger commercial firm about 1 per cent of turnover. Lower down the profession this increases to between 6 per cent and 10 per cent.
A proportion of this money goes towards the maintenance of the Assigned Risks Pool (ARP) - the insurer of last resort for the profession. The insurance market has long lobbied for radical reform of the way the profession is insured, arguing that it unnecessarily escalates the cost of cover for all firms.
Between 2007 and 2009 the total premium pot for solicitors increased by 20 per cent to an all-time high of £245m. The increase resulted in insurers pulling away from the market and refusing to take on new business.
Consequently brokers warned of an impending crisis in the sector: with too few insurers in the sector competition would collapse, they said.
The reality could not have been more different. In fact the declared premium pot was £221m, a fall of 10 per cent on the previous year’s.
According to Steve Holland, executive director of the professions and risk solutions practice at insurance broker Lockton, this was because of some clever underwriting tactics that allowed insurers to declare a lower premium income and reduce their clients’ exposure to the ARP.
That will change this year after complaints in some quarters that firms have been avoiding their financial obligations.
Holland says: “The SRA [Solicitors Regulation Authority] has closed the loopholes and insurers are having to declare the actual premium for the purpose of calculating the insurers’ share of the ARP.
“The SRA recognised that this may unfairly hit the larger law firms and has introduced a £600,000 cap on the amount that an insurer needs to declare. Even with this cap some insurers are demanding six-figure additional premiums to cover the extra money that they estimate it will cost them to insure the uninsurable firms in the ARP.”
Under pressure, the SRA announced the closure of the ARP in 2013.
According to brokers this will improve competition instantly and drive down rates for all lawyers. They say it is a move that should have been made sooner.
Prime Professions head of risk solutions Martin Ellis says: “We know of three insurers that were committed to coming into the market this year had the ARP been closed. Insurers don’t want the added costs, so they stay away.”
Nevertheless, the watchdog has got tough on firms participating in the ARP and since July 2010 it has closed 89 firms that have failed to pay rates.
While it may not be happening at a pace that pleases the insurance market, the reform of solicitors’ PII is already having a positive impact on premiums for the commercial firms.
On the high street, though, survival is not so easy. Higher rents, steeper premiums, a decline in legal aid work and the collapse of the property market all mean the outlook remains gloomy.