Small firms suffer as legal insurers refuse to underwrite in current climate
Following five consecutive years of falling rates, lawyers have been shocked to find that professional indemnity (PI) insurance rates have doubled for the 2009 renewal season. Hardest hit are those already facing a myriad of economic challenges: small firms, sole practitioners and conveyancing practices.
For the past month firms have been scrabbling to get cover ahead of the 1 October renewal deadline and avoid the pitfalls of resorting to the Assigned Risk Pool (ARP) for coverage.
According to Sandra Neilson-Moore, European practice leader for law firm PI at insurer Marsh, at the top end of the profession rates have remained flat or been reduced.
She says: “We saw rating reductions of an average 15 per cent and, for some specific firms with strong underwriting arguments, even greater reductions.”
This contrasts starkly with the bottom end of the sector, where in some instances rates have increased by 100 per cent.
“For the small end of the profession the tide’s turned,” says Steve Holland, professions director at insurer Lockton International. “The larger mid-tier firms have weathered the storm quite well, but at the bottom end firms have suffered from a lack of choice.”
Traditionally solicitors’ PI was seen as a solid book of business for insurers because of its low claims frequency and high level of capacity flowing into the sector. However, an upsurge in claims against conveyancing practices, along with tightening economic conditions, has forced some underwriters to reconsider which risks they will cover.
Insurer RSA (formerly Royal & SunAlliance) has stopped ;writing ;new business for one and two-person firms, while Norwich Union has stopped writing business for firms with fewer than 10 partners that carry out conveyancing work.
Although a lot of attention has been put on conveyancing firms, there is anecdotal evidence that the rating hikes are also beginning to impact on firms without this book of business.
One South London sole practitioner who has a focus on corporate work tells The Lawyer she was “appalled” when informed by insurer Ace that her premium had doubled.
“My business is under pressure,” she says. “The most annoying thing is that the increase appears to be entirely ;random. ;My business hasn’t changed and I haven’t had any claims, but they’ve still raised my quote.”
The lawyer says she shopped around for a better quote, but in the end decided to stay with Ace because she had a long-term relationship with the insurer.
Such stories have sparked fears about a rush on the ARP, which could mean further ;increases ;are implemented in 2009. The publicly available ARP was established to ensure that all UK firms had adequate cover in place. The pool is seen as a last-resort insurer for many firms because it immediately puts the firm on the radar of the Solicitors Regulation Authority (SRA) and rates are well above the market average.
There are 26 qualifying insurers contributing to the ARP, all of which contribute cash to cover firms unable to get adequate insurance. If these underwriters are forced to contribute more funds in 2008, they will look to recoup their losses in 2009, and that could mean further rate increases.
The same insurers that refuse to write cover will end up providing insurance through the ARP at an increased rate. It is a circle that some believe will only be broken by staggering the renewal deadline.
“The 1 October renewal date isn’t good for anyone,” says an observer. “Solicitors leave it to the last minute and some people take advantage of that, which drives rates downwards on an elastic band which is about to snap.”
Since the beginning there have been calls for the single renewal date to be reviewed, and those calls are likely to get louder.
“In a soft market it counts in ;your ;favour,” ;says Jonathan Davis, assistant general ;manager ;of Travelers’ solicitors’ PI division. “In a hard market it goes against the grain.”
However, The Lawyer can reveal that reports of the SRA receiving hundreds of queries about the ARP have been exaggerated.
SRA director of client protection Rob Adams reveals: “To date the ARP has received 261 requests for application forms and just 155 completed applications. Many of these are precautionary applications while firms continue to seek cover backdated to 1 October.
“The figure will change on a daily basis, as some firms will be able to secure cover and will come out of the ARP and others will emerge that will fall into the ARP. The final picture will not be known for several weeks.”
Andrew Jackson, managing director of Marsh’s UK PI practice, reveals that the broker has witnessed a significant ;number ;of lawyers leaving renewal until the last minute and then being left without insurer options. In these instances he advised firms to get information about participating in the ARP.
“Even if you do end up in the ARP, you can still try and get cover elsewhere,” he insists. “There are various rules around that. Also, you have to apply to the ARP in advance, so if you haven’t done it by 30 September you’re effectively a firm in default, so we’ve been advising firms to put in a query.”
Neilson-Moore adds: “It’s not the fault of the process, it’s the fault of the people leaving it too late and thinking this is an easy commodity to buy, like car insurance.”
Insurers, too, are having blame put on their doorstep. And the SRA is promising to look again at how it works with the insurance market.
Adams says: “We’re aware of a small number of insurance companies and brokers who’ve left it to the last minute to notify firms that they’re not willing to offer terms. This isn’t acceptable and we’ll be looking at the wording of the qualifying insurer’s agreement and steps we can take in consultation with the insurers to avoid a similar situation arising in the future.”
Readers' comments (8)
Anonymous | 7-Oct-2008 5:55 pm
PI insurance
My premium has gone up 400%
My crime - a high level of conveyancing.
It's a total cop-out to say that it has been caused by solicitors leaving it till the last minute. I know some solicitors who applied ages ago, and insurers refused to quote until the last minute. Norwich Union has totally changed its underwriting policy this year - "immoral" my broker called it. But the blame lies with the SRA, in having 1 October as renewal date for all. The insurers have the legal practice over a barrel, and they know it.
The SRA is aiding and abetting this daylight theft. They MUST move away from this date. Too late, however, for the scores of high street firms who are now forced to close. Thanks a bundle, SRA!
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Frank Maher, Legal Risk LLP | 8-Oct-2008 3:49 pm
Small firms suffer as legal insurers refuse to underwrite in current climate
Surely it is not quite accurate to say that reports of the SRA receiving hundreds of queries about the ARP have been exaggerated when the article reports there have been 261 enquiries. In addition to the 155 applications (approximately a tenfold increase on last year's number of firms in the ARP), there will be many firms who are hoping they will obtain backdated insurance and who by definition are currently 'in default' and liable to pay the ARP an increased premium - a gamble which may backfire.
There will also be others in denial who have done nothing yet. Some firms faced tenfold increases in insurance costs this time. We know of one very small firm which saw its excess increase from £5,000 to £50,000 per claim (x3). Many firms were not told that they were not being offered renewal terms until a couple of days before the deadline, even though they had applied in good time. There are yet further problems emerging too but beyond the scope of this comment box!
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Richard Burnett LLB ACII Chartered Insurance Practitioner | 9-Oct-2008 1:38 pm
Professional Indemnity
The factors behind the dramatic premium increase for the 2008 Solicitors PII have been brewing for many years - in fact, ever since the cessation of the SIF in 2000.
It comes as no surprise as PI claims have continuosly & increasingly exceeded premium every year (the reason why the SIF hung up its boots). As a result, every year as we approached the Solicitors PII renewal "season", there were increasing calls for premium rate increases. No heed was paid & instead we had declining rates - thus, it is hardly surprising the screw has turned; delay has made the adjustment that much more painful.
Instead of this being managed properly with incremental increases each year, the portends were ignored until this year when the pressure reached bursting point. This was not been helped by more examples of poor management - your article is quite correct that insurers have left declinatures of existing cases until too late for many firms to find alternative cover before the 1.10.08 deadline.
Thus, they had to take an involuntary & ill deserved dip in the Assigned Risks Pool ("ARP") until they can get open market cover; this will place an unwanted taint on their record for renewal in 2009 & beyond.
The ARP was originally intended as a holding ground for the "bad boy" practitioners or firms, whose record was just too bad for the open market to enable them to mend their ways or be closed down after two years.
Many small firms who have been priced out of their PII simply do not deserve this treatment. Your article correctly stated that the number of PI insurers authorised by the SRA available to smaller firms is very small. There are 26 insurers authorised by the SRA but as a significant number cherry pick the big premiums from larger practices to leave only a handful of insurers willing to offer terms to smaller firms or sole practitioners.
To cap it all, the 1st October common renewal date causes chaos, not helped by the firms who every year leave their renewal until the last minute - be it due to pressure of work or poor management. Consider for a moment: there are about 10,000 firms, each of who will seek at least 3 or 4 quotes through 2 or 3 brokers - this is about 100,000 enquiries which only 26 SRA authorised insurers have to handle in the space of 8 weeks. It gets worse: firms of 4 partners or less constitute about 90% of firms in England & Wales - as discussed above, this market is handled by about 6 insurers, who thus have to cope with about 90,000 requests for quotes. This is a total log jam for brokers & insurers as they cannot devote enough time to each case and can only cope with sausage machine methods.
As in the rest of the insurance market, if Solicitors PII were to have renewal dates throughout the insurance year, proper consideration could be given to each case.
No other profession operates such a dickensian system and it must be abandoned before even more harm is done to small to medium firms, who are the vast majority of practices in England & Wales and are the legal lifeline for the majority of ordinary people.
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Anonymous | 10-Oct-2008 4:01 pm
PII
'Supporting Solicitors' is the Law Society's slogan.Where was there support during this major crisis for the smaller firms. There was not a word on their website and only two articles in the Gazette which offered nothing. The silence was deafening.
One wonders wether the Law Society is happy to see the small firms disappear so that the 'big boys' who control the Society and gobble up the crumbs. There was no advice, lobbying or even a mention of support for the small firms. Thanks TLS for your unwavering 'support'.
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Anonymous | 17-Oct-2008 1:31 pm
PII
I'm a sole practioner in intellectual property and was told very late on in September that Aon would not renew my cover with them, despite a totally clean claims record and having used them for 3 years running. They helpfully told me that Zurich had also said no.
On telephoning around frantically, I was informed by various brokers that only 4 insurers would touch a sole practioner in such a risky area as IP (what this perception of risk is based on, I do not know). These benevolent four insurers included Aon and Zurich. HSBC was the third and they wouldn't even send me a form - there was no point apparently. While my application with Quinn (no.4) was pending, the SRA advisor told me I had to immediately apply for the ARP (and pay 27% of last year's gross turnover - yes, turnover, pre-tax, pre-everything turnover).
She said if I was late applying, I would be in default of the rules and would have to pay 47% instead. I told the advisor that either way this was commercial suicide (a spell in the ARP would no doubt tarnish my practice for ever) and I would rather close down and face the run off premium (2x last year's annual premium - a bargain in comparison, until you factor into this the loss of my livelihood).
It was only on digging around in the Solicitors' Indemnity Insurance Rules 2007 that I discovered a special "joint venture" between the Law Society and St Paul Traveler, whereby St Paul had committed to quote for all claims free solicitors, regardless of size or practice area. It's rule 5. That's just underneath Rule 4 which is all about the ARP and how much that costs.
I had to remind St Paul of their commitment in this regard in order to squeeze a quote out of them and am just disgusted that the SRA would have made me clean out my bank account unnecessarily on account of their ignorance of their own rules. God knows what I'd do if I had any claims against me. I think that would simply be time to ship out of the profession.
This isn't an isolated case, all of the other specialist sole practioners I have talked to have had simililarly traumatic experiences and today I heard of a very successful medium sized firm being forced to pay an extortionate premium simply because they were refused cover 2 days before renewal. And this was presented to them as a very special favour by the broker. None of this is in the interests of the consumer, who will be left with no access to reasonably priced practitioners (i.e. those who don't charge £750 per hour for partner time). The 'open market' simply isn't working and we need to take serious action and quickly.
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Anonymous | 17-Oct-2008 9:19 pm
PI Insurance
I can't believe anyone can legitimately whinge when they have left the renewal so late in the day! I'm a sole practitioner and I have always had my PI insurance confirmed at least 2 months before the renewal date - why leave it until the last minute?
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Brian Arrigoni | 28-Sep-2009 6:22 am
The legal profession has only itself to blame. If solicitors cant stand the heat - get out of the kitchen
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Anonymous | 3-Jan-2010 0:04 am
What of those who have cover, and when a claim hits, insurers are trying EVERYTHING to not pay?
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