Professional indemnity insurance – A survival guide

Navigating the renewals maze for PII has only got harder. We provide a guide to the sector’s underwriters while brokers advise on the best line of action

As hundreds of firms prepare to renew their insurance cover for the next year, so many will discover this is a market that has been subjected, once again, to a myriad of reforms. The professional indemnity insurance (PII) maze is difficult to navigate. If you are scouring the market for a decent premium that gives adequate cover, then read on.

After staff and property, insurance is the third largest overhead for most UK firms. And yet it is a market in a constant state of flux, where regulatory requirements clash with market movements on an annual basis. Since the Solicitors Indemnity Fund was scrapped in 2000, the debate over just how the sector should operate has raged.

PPI

Lower limits

The most recent proposals from the Solicitors Regulation Authority to lower the required compulsory cover limit for solicitors to £500,000 per claim has sparked yet another war of words. The aim of the change was to bring costs savings for sole practitioners who have had to carry the burden of rising premiums in recent years. But that has not happened, according to insurance market counters. 

In fact, lowering the premium requirement, brokers and underwriters argue, could have the adverse effect of leaving a firm with inadequate cover. If that firm encounters a weighty professional negligence claim and doesn’t have enough insurance to cover the cost, the entire legal market will end up picking up the tab, it is suggested.

Market forces

The aim of the reforms is to encourage more insurers to enter the market, sparking competition for your premium.

In 2013/14 there were 25 qualified insurers operating in the market. QBE, Travelers and Zurich were the largest players last year and all three aim to grow their PII books again this year. While all three will offer policy terms to firms of all sizes, they are not suited to every firm.

Sector challenges

Different legal sectors will encounter their own challenges. In conveyancing, a market that has been through some turbulent times since 2008, premiums have risen as insurers have backed away, put off by the risk of claims being too big.

AIG, for instance, is offering cover to firms with more than seven partners whose business has less than 20 per cent exposure to the conveyancing market and whose claims ratio has been below 30 per cent for the past five years.

At the other end of the scale, firms sitting in the top 50 of The Lawyer’s UK 200, typically with turnover of £60m-plus, will benefit from new entrants. A-rated insurers CV Starr and Endurance, and A+-rated Libra all aim to break into the market. XL, which cut its market share from 16.5 per cent in 2012/13 to 2.2 per cent last year, is active in the Top 50 market again and looking to grow, as is Zurich, which currently insures a limited number in this sector.

Travelers and QBE, meanwhile, are the sector stalwarts and will again be competing in this arena.

While the regulator and insurer argue over what shape the market should take, your firm can do much to help itself improve renewal rates. The use of a broker will help smooth the process but good risk management is also essential.

The Lawyer has spoken to leading brokers for their top tips for this renewal season, and Lockton International has provided a list of the underwriters taking part in the sector this year, providing a handy tool with which navigate your way out of the market maze.

market players

TOP TIPS

Willis Legal Services Practice Group executive director Colin Taylor

Understand the insurers’ viewpoint – ensure your renewal proposals address the issues that matter to insurers over and above the proposal forms.

Use a specialist broker – ensure your broker is a specialist and understands your firm’s risk profile. Your broker should have broad access to the market and be well suited to placing business of your size and specialism.

Be risk aware – ensure your firm is risk aware from top down and bottom up.

Carry out a claims schedule assessment – it is important that the claims history is closely examined in terms of status and reserving. It is often found that reserves are being held for matters that can be closed, thus affecting the overall ‘burning cost’.

JLT Specialty partner Patrick Strange

Clearly demonstrate:

a strong risk management culture and risk awareness practice 

horough due diligence over acquisitions and lateral hires 

strong financial sustainability and leadership.

Marsh head of solicitors’ PII for Europe, Middle East and Africa Sandra Neilson-Moore

Prepare the proposal form well – legibly, intelligently and sensibly. If you have good things to say about your risk management, make sure you say them. If there are claims, disclose all information, including ‘lessons learned’ and how such claims will be avoided in the future. 

Be careful in your description of your practice areas – describe them correctly. If the form doesn’t ask for the categories in the way your firm keeps this information, use a supplementary attachment of your own creation instead. 

Use a recognised, qualified and knowledgeable broker – challenge them to explain how the terms have been developed. If the primary insurers are willing to meet with you (you will probably have to be a larger size firm for this to happen), meet them with your broker so that you can tell your story ‘face to face’.

Lockton solicitors practice group manager Steve Holland

Don’t leave arranging PII to the last minute – get your proposal completed promptly.

Larger firms should meet with the insurer and potential insurers – build a relationship with them so they know and understand your firm.

Review claims regularly – and challenge reserves that seem too high, or matters that should be closed. 

Undertake an objective appraisal of claims and their causes – create an action plan to address key problems.

If you are regarded as a ‘high risk’ practice (by virtue of claims, work profile, size or financials) – address those issues with insurers and where possible differentiate yourself from other firms that might fall into that category.

Aim for longer-term premium stability rather than short-term unsustainable deals.

Arthur J Gallagher Professional Risks Division director Peter Jones

Ensure you determine the correct level of indemnity limit for your firm by considering all the work you have completed over the past six years. It’s important to ensure you have the appropriate level of protection in the future, and this critical point is often overlooked.

Claims information is crucial. Your confirmed claims experience (CCE) should be recent and obtained from current and previous insurers. Most insurers CCE detail can be scant so it is advantageous to accompany this with a brief summary, especially on the larger or complex claim where more detail is required.

guide

Thought leadership in association with Travelers

Travelers

Rated insurers and the SRA’s rejection of a minimum credit rating

 

Sawyer

David Sawyer, assistant general manager, Travelers

New entrants into the solicitors professional indemnity market are a familiar feature of the October renewal season. Those insurance companies with ambitions to provide long-term cover to solicitors should be welcomed. Alas, not every insurer necessarily thinks in those terms.

By its very nature, solicitors professional indemnity insurance (PII) is a long tail liability product.  Claims can take many years or indeed decades to manifest themselves. It is therefore imperative that those insurers operating in the market have the resources to handle claims arising from work that was undertaken many years before. 

Law firms also need a strong sense of financial certainty and continuity when an insurer makes this long-term commitment to them. For example, because of our financial strength, size and security, Travelers Insurance Company has been rated as A by A.M.Best and AA by Standard & Poor’s, which we feel is highly reassuring to our policyholders.

However, unrated insurers come with a substantial financial risk attached. If, for example, they are declared insolvent, the Financial Services Compensation Scheme may not cover a claim in full, leaving the law firm to pay additional costs and legal fees and still purchase a replacement insurance policy. 

Indeed, when unrated insurer Balva had its operating licences withdrawn in 2013, there was an inevitable drop in the amount of available solicitors PII capacity. Any withdrawal of an insurer from the market will lead to a reduction in insurance capacity. Fortuitously in this case there are still an ample number of rated insurers to provide choice for solicitors. 

Despite risks around insurers with low financial security, the Solicitors Regulatory Authority (SRA) recently decided against the implementation of a minimum credit rating for solicitors PII providers. It has always been the SRA’s position to make its decisions with the end consumer in mind. Likewise, the SRA is at great pains to point out that it is not a regulator of financial institutions (that is a job for the FCA) and the decisions it makes are a direct result of consultation with its members. So, the SRA has listened to its members and determined that implementing a minimum credit rating would restrict the spectrum of choice in the market and impact solicitor firms. It remains to be seen how this decision will benefit the long term stability of the market.