Firms need to embark upon a voyage of self-discovery in preparation for their PI renewal dates. Martin Ellis and Colin Taylor reveal the measures required to satisfy the increasingly picky underwriters
The current economic climate and the negligence claims arising from the downturn in the property market are causing concern for nearly all professionals. The economy continues to rumble along the bottom of the cycle and some commentators are talking ominously of a double-dip.
For many, these issues have translated into rising professional indemnity (PI) insurance premiums, but for solicitors there may be light at the end of the tunnel. There is, however, still widespread concern that at a time of significant pressure on fee income some smaller firms may again have problems obtaining affordable PI cover.
For most firms the PI premium is already their third largest single expenditure. All firms have looked to manage their costs even more carefully than before. It is at times like this that firms need to take a good look at their cost of risk, how risk is managed, retained or transferred and, just as importantly, how they present the information required by insurers.
The Assigned Risks Pool (ARP) has been widely reported as being a big issue for insurers, and the Solicitors Regulation Authority (SRA) now has a roadmap for its abolition in 2013.
As you might expect, insurers do not have the greatest appetite for solicitors’ PI risk at the moment. With the majority operating on loss ratios approaching or exceeding 100 per cent, they are even less hungry than usual for risky new clients.
The light at the end of the tunnel referred to earlier is the availability of some early renewal offers that in recent years have not been in evidence. This is a sign that insurers are looking to retain their low-risk clients. They will be looking to replace a number of higher risk firms to better balance their portfolios in preparation for the approaching extended policy period in 2013.
It is fair to say that insurers will be particularly wary of smaller firms, where fraud has been a big issue. In many ways sole practitioners present a better risk profile in this regard as there is no cover provided for fraud to sole practitioners and they are covered by the Solicitors’ Compensation Fund.
Firms with two to four partners, however, remain a focus of concern for insurers and they will have to go the extra mile to grab the attention of insurers and show they are well-run, low-risk viable businesses. Larger firms will also need to ensure they show good risk-management practices, as the recent spate of mergers has brought many issues to light that were not identified during due diligence.
Boost your chances
For a subject of such importance it is surprising how poor many insurance submissions are. The process of renewal needs to be effectively project-managed. Having a clear structure to the process for how your PI insurance is prepared for, negotiated and renewed is essential. There are ways in which firms can improve their chances of securing a policy.
The application process will include detailing a firm’s financials and claims history as well as meetings and interviews to reassure the insurer that they are working with a safe firm. In addition to this, insurers will want to see evidence of robust risk-management systems and a strong record of implementing them. This can make all the difference.
Risk-management processes are essential in reassuring underwriters. They will want to see what strategies you have in place, and having systems such as Lexcel as well as employing individuals dedicated to risk-management helps. Providing claims information that accurately reflects experience and giving insurers enough information on corrective actions, lessons learned, audits etc, can greatly assist your broker.
Firms with a high percentage of income from property will need to be especially careful. The crash has led to an unprecedented number of claims in this area, easily accounting for more than 75 per cent of claims brought in the past five years. Insurers reserve extra-special attention for property teams. You need to demonstrate close control over conveyancing departments and knowledge of your client base.
In the end, underwriters want to know they are backing a reasonably safe horse so it is critical that firms provide compelling evidence that they have risk-management processes in place. Whether you experience plain sailing or a perfect storm is down to the commitment of fee-earners to quality, approaching renewal with an effective strategy, preparing information that is concise and professional and aligning yourself with an adviser who can negotiate terms professionally. So there may be light at the end of the tunnel for some, but not for all.
Martin Ellis and Colin Taylor are directors at Prime Professions