Many insurers are trying to hold their premium rates stable and introduce rating increases for certain types of work. But the law of supply and demand means that a surfeit of insurers prepared to underwrite solicitors’ professional indemnity (PI) business will continue to put pressure on underwriters’ rates.
We have seen new insurers enter the market, securing significant market share. When such competition arrives, it is clear we are at a low point in the market cycle. There is likely to be even more aggressive insurer competition for those legal firms with a proven track record and quality risk-management systems and procedures.
However, it is clear that some insurers will come to a point where there is a ‘walkaway’ price – where they will not insure below a certain premium level. The early warning signs are there: insurers gearing up for October renewals already want a better understanding of clients’ business profiles.
This year solicitors have been asked far more probing questions than ever before. For example insurers are demanding more information on monitoring visits or forensic investigations by the Law Society and the Solicitors Regulatory Authority.
Insurers will also be looking at tax issues – an area where there has been large numbers of claims arising from a lack of clarity on legal firms’ retainers and whether that has been included in the terms of engagement. Insurers are saying, “Okay, if you’re giving tax advice, is it in relation to implementation of schemes by others or is it in relation to their own schemes?”
This comes as it emerged that The Accident Group (TAG) claim against 700 law firms had finally been mediated at a reported £30m settlement – substantially less than the £100m-plus that had been claimed for. The claim was brought by international reinsurer Wintherthur, which accused 600 solicitors of deliberately passing on dubious personal injury cases through TAG and causing its collapse. Wintherthur, which reinsured TAG, wanted its money back. TAG chief executive Mark Langford escaped prosecution by disappearing to Spain. He died last year in a car accident.
Looking at the global picture, financial institutions face $400bn (£201.51bn) of write-offs as a result of the US subprime crisis, according to finance ministers and central bankers from the world’s seven most industrialised nations who met in Tokyo earlier this year. There are no doubt many more liabilities lurking within firms’ balance sheets that have yet to be disclosed or discovered.
Other potential exposures include the directors and officers (D&O) insurance market, where directors of these financial institutions are now being pursued by shareholders which hold them responsible for their losses. It is estimated D&O losses are as high as $9bn (£4.52bn) and could spill over in to the PI insurance sector. Senior executives on the wrong end of D&O lawsuits will turn on lawyers who drafted their contracts or advised on the collateralised debt obligations (CDOs).
Although there have been no losses in the subprime sector yet, insurers feel this is going to be the next big area of risk for solicitors and are identifying firms that might have a potential exposure. Elsewhere, insurers ;normally ;ask ;how ;many conveyancing transactions have been undertaken, but this year in particular they are drilling down into first-time mortgages, re-mortgages, subprime loans, property clubs and new build for developers.
Claims against solicitors, valuers and mortgage brokers may occur if property prices continue to slump. In property fraud, what we have seen so far may be just the tip of the iceberg. The property crisis is triggering a deluge of claims against surveyors, with the current downturn causing insurers to review the extent of PI insurance cover they offer surveyors. Specialist valuers and surveyors are therefore experiencing more difficulty placing cover.
Mortgage brokers are also suffering, with some being refused cover or experiencing significant rises in their insurance premiums – in a few cases by as much as 500 per cent. Although we will not see such premium hikes for solicitors, we hear from a number of insurers that they will be putting up their rates for firms involved in conveyancing.
We might be at the bottom of the insurance premium cycle but the prognosis for the future does not look very healthy. Now would be a good time to consider a longer-term policy. Insurers are not necessarily willing to tie themselves into two- or three-year deals at the moment, but if such an option can be negotiated with attractive terms it is worth considering.
PI insurance buyers have enjoyed a welcome period of soft rates, but no one can predict with certainty when rates will start to rise again significantly or by how much. What is certain is that when the PI insurance market turns, the correction will be savage. You have been warned.
Steve Holland is a director in the professions division of Lockton International