Smaller firms bear brunt as insurers raise professional indemnity rates
14 September 2009 | By Katy Dowell
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Lawyers on all levels are suffering the worst economic downturn in more than a decade.
And although the worst may be over, more than 4,000 solicitors have lost their jobs and professional indemnity (PI) claims against lawyers are on the rise. As a result lawyers are now facing a significant hike in PI rates, which are expected to hit finances hard.
For many firms the PI insurance premium is the third-largest overhead they face, following staff and property costs. The Solicitors Regulation Authority (SRA) requires every firm to renew its cover by 1 October each year.
This has been the rule since the abolition of the Solicitors Indemnity Fund (SIF) in 2000. The top end of the profession has since basked in the glory of softening rates, buoyed along by a passive claims environment and a surplus of insurers in the sector.
By contrast, those sitting at the bottom of the sector, the two or three-partner firms and sole practitioners, are considered a bigger risk by the market and therefore will have had a rate hike thrust upon them.
Managing director at insurance broker PYV Legal Nick Pointon comments: “Smaller firms are getting hit, due primarily to the rising number of claims within conveyancing, coupled with an increased chance of the firms failing and the impact of fraudulent activity in the market.”
There is some evidence to suggest that this is also happening to smaller commercial firms.
In the past year Hextalls became the first top 200 firm to enter prepacked administration, re-emerging as Hextalls Ltd (The Lawyer, 11 May). And, after trading for nine months under a company voluntary arrangement (CVA), Buss Murton completed a prepacked administration in June (The Lawyer, 29 June).
These are firms that have worked hard to build up dedicated client lists, but have been crippled by over ambitious growth plans - and this is indicative of wider trends at the bottom of the market.
Indeed, it is the prospect of firms collapsing that has insurers running scared.
The divergence between the top and bottom of the sector may not be of much concern to the insurance buyers at the top 50 firms. However, underwriters believe the hike could creep up through the profession.
“There’s real tension between lawyers and insurers,” one senior underwriter says. “Insurers want to top up the coffers, but lawyers don’t see why they should have to pay more. And the more savvy lawyers won’t have to pay more - not this year anyway.”
Ej Hentenaar, managing director of insurance broker Lockton Companies, points out that insurers are aiming to top up the premium pot.
“There’s an overall drive to push rates upwards,” says Hentenaar. “Generally it’s not happening, but underwriters need to keep their managers happy and the managers want rates to go up.”
“Last year,” adds Pointon, “the premium pot was half what it should have been in respect of paid and reserved claims.”
Considering that the total premium fund as of 1 October 2008 was worth £216m, “it’s accepted now that the premium pot is too low and insurers would like to see it rise towards £300m this year”, explains Pointon.
Underwriters also have to consider the legacy claims that could emerge in the forthcoming year. In addition, they will have to deal with the Assigned Risk Pool (ARP), which is expected to bloat to as many as 500 firms this year.
The ARP is a last resort for firms unable to obtain cover in the market. Those participating pay premiums of up to 30 per cent of fee income to get cover.
This, too, is bad news for the insurance industry, which has an agreement to pay claims arising out of the ARP. “It’s another reason why insurers want rates to go up,” according to one underwriter.
Further problems come for sole practitioners who decide to close up shop and enjoy retirement.
“They have to pay insurance for the next six years,” says Peter Heginbotham, senior partner at Manchester-based David Blank Furniss.
These are firms that have been quoted premiums that are more than double what they were last year.
At the other end of the spectrum rates are up by between 5 and 10 per cent.
“People in the City are shocked,” says a former Addleshaw Goddard partner. “They’ve had a tough year and now they’re told they have to pay more for cover. They’re more of a risk, they might get sued, they could commit fraud. PEP [average profit per equity partner] is down and the bills are up.”
According to Hentenaar there is no shortage of capacity in the sector and new players are still getting into the market. Royal & Sun Alliance may have pulled away from three-partner firms, but Inter Hannover, the primary insurer of reinsurance giant Hannover Re, is coming in.
Sandra Neilson-Moore, practice leader for law firms at broker Marsh, argues that market control is very much in the hands of the insurers, which control rates at the top end of the profession.
“Over 80 per cent of the premium applicable to the qualifying coverage is underwritten by six insurers,” she says.
There is talk of a crisis in the solicitors’ PI sector that will have a serious impact on smaller firms. In reality, however, the more sophisticated insurance buyers are yet to feel the pain.
However, the real shock will come when the profession is hit by a mass of claims and insurers start pulling out of the market.