Solicitors could face increased ;professional indemnity (PI) insurance bills this year after five years of softening PI rates.
PI insurance is the third-largest overhead for any firm behind property and staff costs, and firms are required by the Solicitors Regulation Authority (SRA) to renew their cover by 1 October each year.
While rates have been kept low due to the high number of insurers flocking to the market in search of low-risk customers, experts are warning that the end is nigh for bargain PI rates.
Although there is no clear indication of a rating correction at this stage, Steve Holland, professions director at insurance broker Lockton International, believes it will happen. “The tide’s beginning to turn,” he says.
Some underwriters are already beginning to flood the market with scare stories about rate increases of at least 10 per cent, with composite insurers such as Royal & SunAlliance (now RSA) and Norwich Union pulling away from the bottom end of the profession. But lawyers remain sceptical about the likelihood of a 25 per cent rate hike.
“Underwriters are always saying next year’s rates will jump up,” says one senior partner. “We’ll have to wait and see, but right now it certainly doesn’t look that way.”
Another partner adds: “We’re seeing plenty of press about rates hardening, but in reality we don’t expect to be paying any more than last year – especially not at this renewal season.”
It is easy to see why lawyers are unwilling to take the threat of a rate increase seriously.
Sandra Neilson-Moore, European practice leader for law firms’ PI at global broker Marsh, says: “There are individual underwriters who are trying to move the market, but they don’t have much hope. Are they going to be willing to lose business because they’ve increased premiums?”
Solicitors’ PI tends to be low risk and highly profitable, meaning a broad spectrum of insurers have been drawn into the market, which has caused rates to fall. The fact that rates are based on fee income from the previous year has also helped keep rates low – and as fee income to the profession has boomed, insurers have been willing to make further concessions.
Lawyers have also faced a low frequency of claims, with values remaining proportionately small fry.
In fact, Neilson-Moore suggests that the profession would need to be faced
with five successive £10m negligence claims before the market could harden.
On the face of it, this seems ;like ;a ;win-win situation for firms. Rates are low and the Law Society has struck a deal with underwriters to ensure the terms and conditions of policies are broad in their definition and are effectively gold-plated.
Yet professions director Mark Casady at insurer QBE says that, by forcing insurers to give generic terms of cover, the Law Society has failed to help firms.
“The actual quality of the cover is very good,” says Casady. “But that policy is designed to protect the public and not the solicitor. For insurers that’s very difficult, because it doesn’t afford us any protection from deceit, lies and fraud.”
Casady says that, as a natural consequence, insurers do not differentiate PI policies. This means that in reality there is a dearth of choice in the sector, with Clifford Chance having the same policy in place as a one-partner firm in Torquay.
When a rating correction is eventually introduced there will be little point searching the market for a new insurance provider, because terms and conditions will dictate the price of the risks all underwriters are willing to take on.
Unlike the Financial Services Authority (FSA), which tracks claims against the financial institutions it regulates, neither the SRA, or the Law Society have records of professional negligence claims brought against lawyers and their firms.
This is important, because if rates increase substantially next year, as experts are warning, and firms are left facing hefty insurance bills or are without coverage, neither the Law Society nor the SRA will be able to effectively argue against the increase.
While this may not seem a pressing matter in 2008, in a year’s time lawyers may see it in a different light.
“At the moment the majority of pain is at the low end of the market,” warns Jim ;Jack, ;Zurich’s professional and financial lines business development manager. “If you’re a sole practitioner, you’re beginning to run out of insurers from which to buy cover.”
The worst hit this season are ;those ;firms ;with conveyancing practices –
the same firms that are currently laying off staff.
“There’s been a 20 per cent increase for conveyancing firms, but most firms have a mixture of work, so it won’t be a really hard hit,” says Holland.
Following 9/11 PI rates jumped by up to 40 per cent. This is reflected in the Solicitors’ Indemnity Fund (SIF) cash pot, where funds jumped to £245m by 2003. According to Holland, the credit crunch “may well put us back on an equal footing as the last hard market”.
With ;negotiations between firms and insurers ongoing, many senior partners are reluctant to discuss their take on the market. In private, however, they are highly suspicious of attempts to talk up the market price.
“We’re trusting the brokers on this,” says one managing partner. “They tell us rates are flat for now and that’s where we expect them to stay – at least for this year.”