Professional indemnity insurance: Toughing it out

As the renewal season for professional indemnity insurance approaches, insurers see the market hardening

How are law firms approaching the 2013 renewal season?

Sandra Neilson-Moore, head of solicitors’ PI for Emea, Marsh: Large law firms are organised about the way they are approaching the renewal of their professional indemnity insurance (PII) programmes. Renewals are proceeding normally.

Moss
Moss

Trevor Moss, director, Brunel Professional Risks: We’re seeing a wide range of responses from solicitors. Some firms were keen to get terms from the market even before insurers ‘opened shop’; others have yet to complete their renewal submissions with only a month to go. The key for all solicitors, however, is to make sure they take time to complete a thought-through proposal.

John Wooldridge, director, Howden Windsor: Many law firms do not appreciate how turbulent this year’s PII market is, especially for firms with 10 partners or less. Most of the main A-rated insurers are being more selective this year and, as a result, firms with more than 35 per cent of their business coming from commercial and residential conveyancing are finding it harder to get affordable premiums.

I fear some brokers and insurers are delaying issuing terms because they know their clients will not like the premium increases they face and, by holding terms until the 11th hour, clients will not have the time to seek cheaper alternatives.

My advice to law firms is to complete your proposal form as a matter of urgency and insist that your broker provides terms within seven days. If renewal terms do not materialise, canvas the market for cheaper quotations.

Steve Holland
Holland

Steve Holland, senior vice-president, Lockton Global Professional Risks Solutions: From 1 October solicitors will be free to choose a renewal date that suits them. There are both potential advantages and disadvantages to having these staggered renewal dates, which depend on the state of the market and the size of the law firm. These kinds of considerations are having an impact on how firms are approaching renewal season this year.

It seems likely that the renewal date for many larger firms will change because they will want to choose a time of year that suits them. Some firms have said they would choose to align their renewal date with their financial year-end because it makes budgeting easier, while others consider that to be worst time of the year because they are already working flat out on their year-end billing targets. Longer periods of insurance may be an attractive option for some.

That said, even with the option of staggered dates there will still be a high proportion of the profession initially clustered around 1 October because of the time it takes for firms to move their renewal to a different date. Firms that merge or start new businesses are the most likely to move away from 1 October.

Martin Ellis, prime risk solutions head, Willis: Larger firms have been preparing for some time, liaising with their broker, agreeing a strategy and working to a timetable. Most would have met with insurers some time ago and some will now be considering the options. There are still only a relatively small number of viable primary insurers for larger firms so ensuring competitive pricing depends on the firm’s risk profile, claims experience and relationship with insurers. Firms should get to know the key players, in particular the primary insurers available to them. Some firms do this better than others. In fairness, this sometimes depends on the willingness of their broker to spend sufficient time in the preparation and planning phase of the renewal process.

The smaller firms have been generally advised to apply earlier than usual. Securing competitive terms from an insurer of good financial standing has been the theme of this year’s renewal so far.

Are underwriters being more selective about the firms they choose to insure? What are the key questions being asked?

John Kunzler, regulated professions head, Marsh UK: More underwriters are asking for financial details and looking at law firm fin-ances. We understand this is due to law firm insolvencies and the obligation for underwriters to provide run-off coverage for six years, whether or not they are paid any premium. Also, several underwriters are still asking about conveyancing work done in 2006 and 2007 because exposure to sub-prime lender claims remains a concern.

Moss: Underwriters in general are being cautious about the firms they insure. Practice areas causing particular concern include commercial and residential conveyancing, will-writing and probate work.

Insurers are asking for more detailed information from solicitors, and one of the key points this year is that insurers are far more interested in the financial stability of practices and are only quoting if they feel the firm is secure.

With many insurers cutting back their books, more are declining to offer renewal terms. This could mean that many firms will struggle to secure cover by the October renewal date. Under the new conditions the incumbent insurer will need to offer a three-month extension, which means we will almost certainly see the renewal period extended for several weeks or even months.

Wooldridge: Yes. Poorly managed firms, firms with poor claims records, firms that undertake lots of conveyancing and firms that are borderline insolvent are likely to find the market difficult. Insurers are paying much more attention to financial stability, so firms should expect to answer some fairly pointed questions in this regard.

Holland: Insurers are more cautious about the firms they insure. Common themes we have seen underwriters focus their attention on include financial stability, lateral hires and outcomes-focused regulation. Insurers wish to see how the quality of the work is monitored. File auditing is regarded by many insurers as critical to this and a prerequisite to insuring the firm.

Ellis: The move to the extended Indemnity period (EIP) and the continuing economic turmoil has undoubtedly focused insurers on the financial position of firms. Firms with a weak financial position present a significant risk to insurers and, as such, they are looking to form a more detailed understanding of a firm’s balance sheet. In addition, all insurers are rightly still asking for more information surrounding a firm’s conveyancing practice. Conveyancing still attracts the largest number of claims in terms of frequency although other areas of work, particularly commercial transactional work, are attracting higher value claims, some running into tens of millions.

Claims directly attributable to the  financial crisis are coming home to roost and insurers are paying previously reserved claims of significant value. This mainly affects larger firms and some of these may see upward rate adjustment if their claims position has deteriorated in the past 12 months.

Sawyer
Sawyer

David Sawyer, professional risks assistant general manager, Travelers: I can’t speak about specifics for others insurers but it’s clear some are looking to re-engineer their portfolios away from certain exposures while others have withdrawn completely.

Market capacity is shrinking for firms with fewer than ten partners. How will this market develop in coming years?

Kunzler: Despite one or two exits there are still a number of competitors in this space, but quite a few underwriters are wary of conveyancing exposure as they continue to see significant claims activity in this area. Few underwriters are willing to offer terms to firms across the spectrum in this space, often choosing to focus on those doing less than a certain amount of conveyancing or specialists in particular areas. However, as firms show resilience through the recession and conveyancing claims subside, the market should remain viable in the longer term. New entrants have contributed to volatility in pricing and some premiums have been very low. If there continue to be new entrants this trend may go on, but normal market dynamics apply if capacity shrinks.

Moss: Smaller firms with fewer than 10 partners and particularly firms with less than four are in a market with shrinking A-rated capacity. Many firms this year that have had claims or are exposed to problem practice areas will struggle to get A-rated cover. Many will have little option but to insure with an unrated insurer. This will continue for the next few years unless something significant is done to change the minimum terms of cover.

A number of insurers that have been in the market for several years are now questioning the profitability of writing solicitors’ business. This is hardly likely to attract cap-acity into the market.

Wooldridge: The market will get tougher in the coming years, as insurers can’t continue to lose money at the current rate. Risk selection is becoming much more rigorous and I see this trend continuing.

Holland: The 10-partner or less sector is probably the most volatile. Insurers come and go with great
frequency. New entrants think they can make a profit where others have failed. Add to this the uneven playing field between rated and unrated insurers and we see huge pricing disparity for individual risks. The announcement of the Law Society’s endorsed scheme may help bring stability and counteract this uneven playing field between rated and
unrated insurers.

Martin Ellis
Ellis

Ellis: It’s fair to say that a number of the insurers that participated in 2012 will not be writing solicitors’ PII this year, but there are insurers with the appetite to increase their book of business as long as firms meet their criteria.

Insurers are concerned about many firms’ financial viability and their ability to pay increased premiums in the event that claims are made. Many insurers see this sector as less desirable than others but the insurance market is largely dependent on the economy. As limitation starts to reduce an insurer’s exposure to property claims emanating from the boom years and the economy starts to recover, capacity is certain to return and increase.

Sawyer: Questions around financial planning, the Jackson reforms and conveyancing exposure, as well as the COLP/COFA position and engagement with the SRA, are some of the areas of focus for 2013.

What can firms do to improve policy terms at renewal?

Kunzler: Neat and complete proposal forms create a good impression, and vice versa. Those firms with strong finances and low dependency on bank lending should ensure this forms part of the submission. Evidence of risk management systems remain relatively uncommon, although this can make a firm stand out to underwriters as being well-managed. If there have been claims, again evidence changes have been made to recurrence is important to mention.

Neilson-Moore
Neilson-Moore

Neilson-Moore: The most important thing for large law firms is to be aware of where they sit in relation to their peers and introduce competition in a sensible and sensitive manner. Continuity of insurer at the primary level is important but it is also important to know where you are in the pecking order and know what terms you could get from a competitor. That is the way you exert leverage in negotiations with insurers. For this you need an experienced broker with a good idea of what your peers are being charged.

Moss: A complete and well-put together presentation will always make it easier for an insurer to understand a solicitor’s business. Ensure the proposal form is completed with detail and additional information if necessary. A covering letter outlining the firm’s strengths should be provided giving additional information should they have had any issues with claims, regulatory issues or mergers and acquisitions. Obviously, having Lexel, CQS and other quality marks helps, but the key way to improve your policy terms is – don’t have claims.

Where a firm has open claims it is important to ensure these are dealt with proactively to determine if they can be closed off without incurring payments.

Wooldridge: At a basic level they can ensure their renewal presentation is both legible and complete. Prudent law firms will start their renewal process in May or June, meet their insurer at least once during the year and work with their broker to ensure renewal information reflects the firm in the best possible light.

Holland: Larger law firms have always been able to negotiate bespoke policy forms through their brokers, often based on the broker’s own wording. The majority of firms do not need to seek improvements to wording as the broad cover offered by minimum terms and conditions is more than adequate.

Ellis: Despite the importance of PII to every law firm. most proposals sent by solicitors to their brokers/insurers are incomplete. The most common area is claims history. There are often years missing without additional details.

Sawyer: It’s difficult to say but every year the market has insurers that reduce and those that grow their appetite for risk. I don’t expect
future years to be any different.

There are concerns that rates will harden as 1 October approaches. What evidence is there to substantiate this?

Kunzler: There’s no evidence either way at this point, but some insurance carriers are known to have limited capacity so once they have written the premium level they will not participate further in the market. It is risky to gamble on market hardening or softening, given varying appetites and uncertainties about the rate at which market capacity is utilised.

Moss: There’s no doubt it is a harder market for solicitors’ PII this year although firms with excellent claims records are still receiving competitive quotations.

Whether the market hardens further depends on the amount of capacity in the market in the closing weeks. One or two markets will close their doors if capacity is exhausted before 1 October, which could push rates up further. It remains to be seen if the Law Society’s new scheme adds capacity, but the view in the market is that it is unlikely to add significantly to it this year.

Wooldridge: We are already seeing rate increases for firms that have had to change insurers. A number of underwriters, for a variety of reasons, have increased rates sharply or simply not offered renewal terms.

Holland: The appetite of established insurers to grow market share is conservative. Insurers such as XL and AIG are pulling back the type of firms they wish to write and the entry of new quality insurers has not materialised in any meaningful way. Whether we see rates hardening towards the end of September is not known but our message is not to take any chances and renew as soon as you can.

Sawyer: A firm should be looking to develop a relationship with an insurer that understands the risks they face and has a professional and consistent underwriting, claims and risk-management offering.

What can the SRA do to improve the PII options for firms? Has it done enough already?

Kunzler: The SRA’s role is to protect the public and act where risk is identified. The SRA’s decision to close the assigned risks pool (ARP) was intended to help ensure a stable market for PII by removing a barrier that tended to penalise greater participation and was perceived as discouraging new entrants.

In the past few years the SRA has also been investing in improving detection and removal of poor quality firms, and enhanced processes to ensure they are not allowed to open in the first place.

Neilson-Moore: This is not the SRA’s job. The profession voted some 15 years ago for a commercially driven open market system. There is a reasonable amount of choice available and nothing needs to be done by any regulatory authority to improve this.

Moss: Important changes have already taken place – the scrapping of the ARP and the end to the common renewal date, for example – but it is late in the day and significant issues remain. These include the run-off, non-cancellation and non-avoidance provisions.

Relaxing the minimum terms would make a significant difference. For example, if the fraud risk terms were removed or insurers were allowed to void the policy for non-disclosure or non-payment of premium many more rated insurers would enter the market. This would be the quickest way to offer more rated capacity, stable and affordable premiums, and remove the nec-essity for some firms to use unrated markets if they wish to insure themselves and stay in business.

Wooldridge: I’d like to see the SRA do more to manage unrated insurers. It’s only a matter of time before more of them go bust, leaving law firms with uncertain futures. Also, many A-rated insurers take a dim view of their unrated rivals and can question the judgement of firms that entrust something as important as their PII with insurers of questionable financial stability.

I’d also like to see the SRA pursue bankrupt practitioners. Until they address this issue we will not attract new A-rated insurers to the market. It is simply not fair for law firms to run up mountains of debt, cease to trade, take up the pre-pack option and leave their insurers to clean up the mess, often without payment of premium.

Holland: The SRA could do more by looking at the level of cover provided by the minimum terms and conditions. These have become a double-edged sword. On the one hand they provide the widest cover in the market and give comfort to solicitors and their clients, but on the other they represent a barrier to entering the market. More flexible wording that would encourage more insurers to enter would give the profession more choice.

Ellis: The SRA’s responsibility is to ensure members of the profession have appropriate insurance cover to protect the consumer of legal services. The SRA until now has been reluctant to follow the standards set by the regulators of other professions, whereby they only allow rated insurers to participate.

Sawyer: The SRA has many challenges, with the financial wellbeing of firms it’s primary focus as has been highlighted recently in the press. The SRA supports its members in areas of business and practice risk, and in doing so ultimately improves the PII options open to them.