Staggering about

There’s no doubt that there was a hardening of the professional indemnity (PI) insurance market in the past year for firms outside the LB100. The advantages of the soft market have truly come to an end. Many smaller firms have been hit hard by the hikes in premiums, 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.

According to the Law Society Gazette, Solicitors Regulation Authority (SRA) figures published at the end of 2009 showed that solicitors paid £15m more to insurers for PI insurance over the course of the year. The cost of insuring the profession rose from £226m in the 2008/09 indemnity year, to £241m in 2009/10 – up 7% – almost reaching the £255m level seen in the dark days of 2000, the last year of the Solicitors’ Indemnity Fund.

Fortunately for the top-150 firms surveyed here, there are no real concerns about prohibitive PI rises, and there is no hard market as yet. While premiums have gone up slightly overall, just 4% of firms said they felt that the cost of their PI insurance was unreasonable. But while most top-100 firms continued to receive a good deal on their professional indemnity rates in 2009, smaller firms reported significant cost increases as underwriters became increasingly choosy about the risks they would quote.

Firms with an adverse claims experience, or with practices judged to be at high risk of claims, did see increases. A small number of property-heavy firms at the lower end of the LB100 saw rates increase by as much as 50%, according to Sandra Neilson-Moore, European practice leader for solicitors’ professional indemnity at Marsh. Outside of the top 100, some sub-four-partner firms saw quotes increase by up to 300%. In the last hard market in 2002, rates were up 38% on the year before in an attempt to balance the soft rates of previous years. It is unsurprising then that rates have leapt so much in 2009.

‘While in recent years, high levels of competition and strong investment returns have served to keep PI rates down, the impact of the recession means insurers are now focused on writing profitable business,’ said Nick Pointon, managing director of broker PYV Legal, ahead of the 2009 renewal round. ‘While competition remains relatively strong for the larger firms, the smaller partnerships, and in particular those in the one- to three-partner bracket, face a much tougher renewals period.’

LG’s head of risk and compliance Bill Richards, who is also a director at Solicitors Indemnity Mutual Insurance Association, says: ‘The talks I’ve had around the parish say that it was more difficult at the lower end of the market, but for the top 100 2009 wasn’t a horrid year, as there was sufficient capacity in the market, and the expected surge of credit crunch-related claims didn’t materialise.’

In at the deep end

The number of firms in the assigned risks pool (ARP), a safety net for firms unable to secure insurance, has also reached record levels. Steve Holland, executive director at broker Lockton told LB in September that the number of firms was likely to reach 400 in 2009, up from 150 the previous year. The final number was around 300, leading to calls to shut down the ARP and questions as to whether the single 1 October renewal date for law firms’ PI insurance should also be scrapped in favour of staggered renewal dates.

The single date, detractors argue, means that the amount of time that the underwriter actually spends considering a firm’s circumstances is often measured in very few minutes. There simply is not enough time in the allowed period from July to 30 September for underwriters and brokers to do justice to every firm’s proposal for insurance. This means small and claims-ridden firms suffer most. The main argument is that a one-size-fits-all approach does not suit the profession.

But the debate has split the legal industry, and it is largely the smaller firms that say they are getting a raw deal. However, the larger firms feel that smaller practices should think very carefully about a staggered renewal date.

TLT’s director of risk John Verry, who was formerly director of risk and quality at Lockton, has plenty of experience of PI arrangements at law firms. He says the market needs to understand that the issues arising out of this PI renewal date relate to a very small part of the profession and that, by and large, a lot of well-run, well-organised firms should not experience any problems.

‘There’s been a debate, out of which came the idea that if we stagger the renewal date then everything will be fine, and firms won’t suffer bad terms if the renewal dates are staggered. I don’t believe that’s correct,’ he says. ‘Having worked for the insurance indemnity industry, there are certain real advantages to having a communal renewal day.’

One advantage is that with roughly 10,000 proposal forms flooding the market in a very short period of time, underwriters may not be able to give firms the very detailed attention that perhaps they would otherwise, which means that a number of firms could get terms that are advantageous or beneficial.

‘We don’t believe that there would be enough benefits in staggering the renewal date to outweigh the negatives that it might cause to the vast majority of firms.’
Sandra Neilson-Moore, Marsh

‘If you have a staggered renewal date, then there’s going to be an underwriter in professions who’s going to be looking at a lawyer, an architect, an accountant and maybe a surveyor on the same day,’ Verry adds. ‘He’s going to see architects and accountants with relatively low claims and then he’s going to come across a lawyer and think: “Why do I write lawyers? They lose us money or they cost us a lot of money, we don’t make a lot of profit out of them, I don’t think I can be bothered. I’m going to go for more accountants.” So there’s a real danger that they will have more time to look at it, and become even more selective than they perhaps are at the moment.’

Neilson-Moore argues that switching to a staggered date is not a quick-win solution. ‘I think on balance if we go to a staggered renewal date most firms that are dealing through brokers will continue to be on a single date,’ she says. ‘I think that if there begins to be a fragmenting or several different dates, it will ultimately mean that premiums will be higher, because if underwriters have more time to focus on differentials between firms, then outcomes could be negative as well as positive. We don’t believe that there would be enough benefits in staggering the renewal date to outweigh the negatives that it might cause to the vast majority of firms.’

Another point is that the insurance year ends around August. Firms renew at quite a good time in September, because most PI underwriters will have a pretty good idea of what their books are beginning to look like. They have to write certain amounts of business, and in September there tends to be quite a lot of capacity for that. Towards the end of the year or even at the start of the calendar year, that capacity may not be there, and so even good firms may be struggling to get the level of cover that they want. Administratively, there will be advantages for law firms of having the opportunity to choose their renewal date, but detractors argue that it won’t deliver the perceived benefits on premiums.

Neilson-Moore points out that soft market conditions have been far more common than hard markets during the past ten years, and the problems that some firms are experiencing now may be short-lived. ‘At the moment, law firms know when the renewal date is and are prepared for it,’ she argues. ‘Many larger firms are happy with the single renewal date and moving to a staggered system would only add further complexity.’

One for all

It seems the SRA shares this opinion. In November 2009, it said moves to scrap the single renewal date for PI insurance in 2010 were ‘improbable’, warning that any shift to staggered renewals ‘will not in itself significantly alter the overall dynamics of the market’. This was after research by actuaries Lane Clark & Peacock for The Law Society suggested staggered renewal dates would lead to lower premiums. However, Marsh, which was advising the SRA, said the single renewal date should remain.

It seems that the single renewal date is here to stay for the time being. While some single practitioners may have suffered badly, and few are arguing that the system is perfect, our results show that the vast majority of firms are still getting cover. LB