Market Update on Solicitors’ Professional Indemnity Insurance
Mike Perry Head of UK Professions, Marsh JLT Specialty
We have just worked through the first major Solicitors’ Professional Indemnity Insurance (PII) renewal period of 2019 with many firms renewing on the 1st April.
We recognise that dealing with your firm’s PII carries with it a major responsibility as the PII premium remains one of the single largest overheads for a firm of Solicitors. We felt it was important to inform you of developments in the current market conditions, and provide some help and support on how to navigate these choppy waters.
It has been widely reported during the last few months that the insurance market for PII and specifically for solicitors has become more challenging. Driven largely by the outcome of the Lloyd’s of London Performance Review and generally poor performance of solicitors’ PII underwriting portfolios, all insurers providing either the compulsory layer or excess layer insurance are looking for premium rate increases. For many years there has been a good deal of competition in the marketplace and downward pressure on rates and premiums but, as we entered 2019, we have observed that the majority of firms are facing the likely prospect of insurers seeking an increased premium for the PII cover. These rate increases are already affecting firms of all sizes and profile.
Although some insurers have insisted on a double digit increase in rates, others are taking a more measured and reasonable approach. It would be fair to say that rate increases for the primary level of cover have ranged from low single digit to, in some cases, as much as 20%. There will always be exceptions, with some firms being asked to pay more due to a poor claims record, while other firms may even secure a reduction in rates due to particular circumstances. However for most firms it is likely insurers will be seeking premium increases.
We will continue to drive competition to get best prices for clients, but given price volatility, and to mitigate possible shocks to firm’s finances, we consider PII budgets should be reviewed. In order to be able to budget with any degree of certainty, it is important to understand how the insurers “rate” differs from the premium you pay. Insurers calculate the rate by analysing your proposal forms factoring in the type of work done, claims record etc. That rate is then applied to your most recent year-end fee income figures to establish the premium. If a rate increase of 10% is applied, this will only translate to a 10% premium increase if your firm’s fee income has remained static. Any fee income increase will often exacerbate the effect of a rate increase and translate to a significantly higher increase in premium than 10%.
During the last few years, the competition in the insurance marketplace has resulted in premiums that are highly likely to be insufficient to cover the total exposure to PII claims. (According to Solicitors Regulation Authority’s (SRA) data, insurers have paid out in excess of £200m each and every year for over 10 years). Also, the Lloyds review mentioned above has identified law firm PII as an under-performing area, as claims remain significant, and premiums are insufficient to meet them.
This issue applies to both the compulsory levels of cover and the excess layers (“top-up”). Unfortunately, many PII claims have been settled at significant levels and breached the primary limit of cover with multi-million pound payments being made by insurers. Very few claims falling into this category reach the public domain, but they do exist.
As someone who has specialised in Solicitors PII broking for nearly 30 years, I experienced a number of different market trading environments. The current challenging environment has been called a hardening or even hard market by many commentators. It is absolutely fair to say that the majority of insurers are indicating that they are committed to push hard for increases in the rates they charge at both the primary and excess layer levels of PII cover. Our job, as always, is to drive competition and best pricing for you, and we will do so, but it is clear from what we are seeing that underwriting appetite has changed. It will change again, and we are not predicting the future but sharing our current knowledge so that you can plan accordingly.
Primary (compulsory limit) insurance
Firstly let’s focus on the primary level of cover. To avoid confusion, this primary layer is for most firms the SRA compulsory level of cover; therefore £2 million for a partnership or £3 million for a limited liability partnership, or limited company.
In theory, firms have more insurer options than ever before. The only problem we have, however, is a general lack of interest from insurers to grow their current portfolios of business.
That is not to say that insurers will not offer new business quotations but when they did (for those renewing in 1 April 2019), there was a very thorough risk selection process. We experienced far greater scrutiny during the negotiation process than we have in recent years with more and more questions being asked around the management of risk and regulatory issues.
For firms undertaking higher quantities of residential or commercial conveyancing matters, there were definitely fewer insurer options during this April’s renewal period. Many insurers attempt to cap exposure and will only permit a certain percentage of work to come from conveyancing, and although in the past some insurers would occasionally show a level of flexibility, these percentage caps are now being rigidly enforced. Firms need to be aware of this and make the appropriate enquiries of their brokers on the options available. Firms should also expect more questions from insurers this year.
Excess Layer Cover (cover above the compulsory limit)
We are aware of many brokers who are struggling to offer their clients cover for excess layers so you should check this well in advance of the renewal this year.
It has been acknowledged since time immemorial that, for most firms, the premiums charged for excess layers (often less than £1000 for £1,000,000 of cover) have been far too low. The layer of cover facing greatest scrutiny is the cover attaching above the primary generally excess of £3 million. For firms purchasing a total limit PII limit of £10 million, the layer in question is normally £7 million excess of £3 million, typically referenced as the first excess layer.
At present, there is very limited appetite from insurers to participate on this layer and therefore those few who are willing to offer terms are driving an increase in rates which is across the board and affecting all firms regardless of size or risk profile. It is simply a question of supply and demand. Although this may only be a temporary issue, firms must be aware and prepare accordingly.
It is certainly no longer straightforward and only a small number of brokers now have the market relationships and leverage to offer a solution. Talk to your broker about this and ensure they have access to excess layer insurers.
Of course the primary insurance tends to receive the focus and drives the renewal negotiations but, if you are a firm that needs higher levels of cover, your broker’s ability to secure the right levels of cover at optimum levels of premium will be a key consideration and could seriously affect your firm’s cash-flow.
I would strongly urge firms who are renewing their PII between now and the 1st October to contact your insurance broker now and commence the planning process as soon as possible.
As explained earlier, it is clear that insurers will seek to secure increases in the rates they charge. Some insurers may have a “take it or leave it!” attitude but there are those that will listen to reasoned and well thought through arguments during the renewal negotiation. Firms with good claims histories and thorough proposal forms will continue to get the best deals. The key for those responsible for their firm’s PII is appreciating what information to provide and how best to present their firm to the market. Engaging with your (specialist) broker as early as possible is therefore crucial. Do not leave the planning process too late!
If you would like to talk about any of the issues raised in this article, please contact Mike Perry, Head of UK Professions at Marsh JLT Specialty on +44 (0)20 7528 4344 or email. Marsh JLT Specialty’s Legal Practices Group is made up of specialist practitioners committed to providing insurance and risk management solutions to the legal services industry. We represent over 1,500 firms from sole practitioners and high street firms to the larger City practices.