Summer is finally here, bringing Wimbledon, ice-creams and unsightly upper arms to the fore. For law firms it also signals the start of the professional indemnity (PI) renewal season. Firms have until the end of August to sort out their PI arrangements, so how does the land lie this year?
The PI open market has been in effect for two years since the demise of the Solicitors’ Indemnity Fund (SIF) in 2000. Last year the open market generated around £160m in premium income, compared with £250m in SIF’s final year. For those two years, law firms have generally enjoyed lower premiums as insurers clamour for market share and kept their rates down.
For some time, there have been rumblings that this status quo is ripe for upheaval. Insurance markets have been hardening across the board, so PI was always likely to fall in with that general trend. In addition to this cyclical and often predictable hardening, the collapse of Enron and Andersen has made insurers more wary. The 11 September attack has also played its part in creating a situation where insurers are able to put up premiums for underwriting risks.
As if these generic conditions were not enough, firms also suffer from the ‘Michael Fielding effect’. Insurance brokers have been touting the former Lawrence Graham partner as one reason why premiums will go up. It seems that the Fielding effect will be felt far beyond the Lawrence Graham offices, as there is an impression among the broking and PI community that firms need to be indemnified against rogue partners.
Law firms would probably not object to coughing up a little extra in the wake of an unpredictable year. Less well received will be insurers taking advantage of the climate to ramp up prices to balance their own books. It is no secret that some insurers offered low premiums to gain a foothold in the PI market and as a result could be undercapitalised. Some insurers argue that scare stories claiming that premiums could go up by 100 per cent could therefore be attributed to these insurers.
The St Paul, the market-leading insurer for law firms’ PI cover, has said that it will not be contributing to this impending market volatility. Although acknowledging that the post-SIF honeymoon period is over, it says the seven-year itch is far from developing. According to St Paul, it has maintained a sensible approach to setting premiums from the off, and as a result will not be raising them significantly.
One broker says he expects much of the renewals business placed by his company to go up by between 10 and 15 per cent. He did suggest that the overall average rise is more likely to be between 30 and 40 per cent.
And while commentators predict a bumper year for premium costs, there are fewer insurers playing the field. At the start of the open market there were 35 qualifying insurers able to underwrite the first £1m layer of compulsory insurance. This number has dwindled to 26, with Wellington Underwriting the most recent to depart, and it is expected to diminish still further. New entrants are looming, particularly for the top-up cover beyond the initial £1m layer. And brand new PI insurer PRI Group has floated on AIM, raising capital to start underwriting policies possibly in time for the upcoming renewal season.
Amid a harder market and with fewer players to choose from, law firms are going to have to get those fine-tuned negotiating skills working for themselves as well as their clients. Wellington is understood to have provided some cover for Clifford Chance, Eversheds and Linklaters. It seems like the big boys are going to have to shop very carefully, particularly as they have need of the most cover and consequently pay the highest premiums.
The advice from one broker is to get in early. Law firms are notorious procrastinators when it comes to sorting out their insurance cover. Some Lloyd’s of London syndicates have already stopped writing new business as they assess their books to see what room they have to take on new customers. With less insurers to choose from and premiums certain to go up, it is a sellers’ market and the longer firms dally, the less choice there will be. Zurich and St Paul have already started sending out proposal forms. This year, PI insurance is not something you can afford to leave to the last minute.