With PI rates remaining within reach for the majority of law firms, Sandra Neilson-Moore fights the corner for a commercial insurance market
when the ARP is scrapped in 2013
The renewal season for solicitors’ professional indemnity (PI) insurance is about to begin again in earnest. Sensible firms of all sizes should be considering their alternatives. Many have already completed their proposal forms for submission to the markets.
In the past few years there have been dire predictions of rapidly rising prices. It has even been suggested that there might be a complete failure of the marketplace, leaving solicitors with no way to source the required insurance other than a return to a profession-sourced mutual fund.
For the vast majority of law firms in England and Wales, quite the opposite has been the case. Premiums for 2009-10 and 2010-11 renewals were generally flat, usually with reduced rates as a percentage of fee income. In the right circumstances, and with the intelligent use of competition, reductions in premiums were regularly achieved.
However, it should be recognised that, while the situation for most firms has been benign – representing in fact a buyer’s market – there have also been incidences of small firms with excellent records finding difficulty in securing reasonable terms.
This might be the case if a firm’s practice was concentrated in an area that was unattractive to insurers, such as residential conveyancing. Some firms may also have had problems if their financial conditions was not considered by insurers to be robust.
Insurers will be less inclined to insure a firm if they are concerned that it will not be able to pay its excess or run-off premium in the event of cessation of practice. This is because minimum terms and conditions require the insurer to pay a valid claim from the ground up and also to provide six years’ run-off coverage in the event of cessation. These obligations exist notwithstanding the firm’s ability to pay, leaving the insurer to recover the funds from the firm afterwards.
With the exception of these unfortunate few, however, the market is exceptionally healthy both in terms of the number of insurers available for firms to choose from and their competitive appetite. It is clear that there has been no mass exit from the marketplace.
In fact, if we count insurance companies and Lloyd’s of London syndicates under common ownership as one insurer, since 2008 there have been only six withdrawals from the primary solicitors’ PI marketplace. With the exception of Quinn Direct Insurance, none of these were major participants. The largest had no more than 2 per cent of the qualifying insurance premium pot.
These minor exits therefore did little damage to availability and several new participants entered the market during this period. The new entrants more than make up for the ones that have left.
Ripples in the Pool
The Assigned Risks Pool (ARP) has been much commented on as an institution that if left unchanged could seriously disrupt the commercial market availability of primary solicitors’ PI, or at least result in enormous increases in premiums.
It might have been interesting to test the resolve of the insurers. Would a large number have left the market if no changes had been made? Would those that remained have risked losing business to competitors by imposing large premium increases simply because of the ARP?
We will never know, because significant changes have been made to the ARP, and it is slated to disappear entirely on 1 October 2013. However, it is worth noting that the new participants that entered the market in 2009-10 were apparently undeterred by the necessity of participating in the ARP.
To be discontinued?
Are the changes to the ARP justified? They are certainly tough. A firm that is unlucky enough not to be able to source insurance commercially will be out of business in six months or, after 2013, even sooner. The consensus is that the changes are justified – a firm that is unable to secure its required insurance is simply not in a position to continue in practice. But what of the argument that it is not the insurance market that should decide whether a firm can continue in practice or not?
The profession has opted for an open market solution. It has therefore to accept that the decision as to whether a firm can continue in practice or not, and how much it will cost it to do so, will be made, at least in part, by insurance providers.
This will undoubtedly result in a small number of unfair and painful results. In some cases otherwise blameless firms will find themselves out of business simply because they are not acceptable to an insurer.
When there is no ARP to act as a deterrent to insurers competition will rise, perhaps dramatically – and particularly for the larger firms. There are already insurers of some significance preparing their offerings. It is only the ARP that has been keeping them out. For all who applaud a free and commercial market this is a positive development, but there will be casualties because it is a commercial, not a welfare, system.
Sandra Neilson-Moore is European practice leader for law firms’ PI at Marsh