With insurers increasingly selective in the solicitors' professional indemnity market, Leigh Jackson reports on the tough times some firms are facing in the run-up to renewal.
Last year marked a watershed in the solicitors' professional indemnity market. For the first time in a number of years rates began to harden. Previous renewal periods had seen practices of all sizes and disciplines picking up their PI insurance at lower and lower rates as qualifying insurers battled each other for market share.
However, 2008 was entirely different. Insurers specialising in this cover became increasingly selective in the risks they were willing to underwrite and, for the first time in many years, a significant minority of firms began to struggle to obtain affordable cover.
With the 2009 1 October renewal date fast approaching, many firms are understandably worried about their PI cover for the coming year. But the shift in the market has not affected everyone in equal measure. Smaller law firms, typically with less than four partners, have been hit the hardest and are predicted to feel the pinch again this year.
Mark Bracher, development director of Jelf Professions, says that in some cases the rate hikes could be spectacular. "We have heard various examples of firms where their projected increases have been horrendous. One firm paid £4000 last year but was quoted at £35 000 this year," he says. "Conversely, some firms paid £5000 last year and will pay £6000 this year. The trend is upward but firms considered to be a lower risk will not be affected as much."
Large firm, good risk
The majority of the firms viewed as 'less risky' by insurers are the larger ones. In particular, the top 100 law firms are likely to be less affected by the rising premiums.
"Large firms tend to, by and large, represent what is seen as a good risk," continues Mr Bracher. "They are always going to pay high premiums but, in terms of rate increases, they are having an easier ride. The same pattern was emerging last year as this, with smaller clients bearing the brunt of the increases. Insurers are gradually withdrawing from the smaller end; they will still provide cover but want a smaller market share."
The firms who are considered so risky that no insurer will offer a policy are destined for the assigned risk pool. Practices assigned cover in this manner, underwritten on a market share basis by all qualifying insurers in the class, are penalised with hefty rates.
Firms in the ARP will pay 27.5% of their first £500 000 fee income as a premium, increasing to 30% for limited liability partnerships, and on a rising scale thereafter. Conversely, a premium for a small firm not in the ARP could be about 10% at most. Last year, it was estimated that in the days following the 1 October there were more than 150 firms in the ARP. This year, however, the number is expected to be much higher.
"The frightening thing is that the number is expected to be more than 500 on the next renewal," Richard Burnett, account executive for broker Noyce Insurance, says.
And this lofty prediction seems to be one that finds consensus across the market. Jenny Screech, legal professions manager at Zurich, says: "A figure that has commonly been given is 500 to 600 and I do not think that is unrealistic. There will be a significant increase in the number of the firms that can't find cover in the open market this year."
But why has the market changed so significantly for firms, especially smaller practices, over 24 months? An increase in claims against solicitors, brought on by the effects of the credit crunch, is commonly cited as a reason for the flip in the market.
"If we look back over the last four years there was a steady decrease in premiums due to competition but, at the same time, an increase in claims experience," explains Ms Screech. "The recession has started to drive further rate increases and there have been a number of fraud claims during that time."
Impact of downturn
The downturn has inevitably hit some types of practice harder than others, with firms with large conveyancing divisions thought to be more likely to claim and, therefore, facing increased rates.
"There are concerns, which have not been proven in many cases, about the amount of conveyancing work firms had undertaken where they might inadvertently have been mixed up in mortgage fraud," says Brian Balkin, executive director of professions at Lockton International. "The value of work that many firms have been undertaking has increased by huge amounts, while the premiums paid haven't."
With insurers making less money from this class, some have decided to change their approach. Before the 2008 renewal period, for example, RSA had withdrawn cover for smaller practices and Novae elected to exited the class altogether. Overall, the number of qualifying insurers has dropped consistently: from 29 in 2006; to 27 in 2007; and 24 in 2008.
Mark Westgarth, managing director of the professions division at Bluefin, argues that this trend will continue over the next few years. "There is undoubtedly pressure on insurers to get this sector into profit" and quickly" now more so than ever. But there is every likelihood that some will consider this impossible to achieve at the smaller end," he says.
"History shows that Hiscox, RSA, Aviva and Dual all took the decision to exit this segment in recent years. The effects could be huge. After nine years [of cover being brought on the open market] and with pretty much every insurer who has tried it with smaller firms having failed, it will be a brave underwriter who jumps in with both feet now," adds Mr Westgarth.
The blame for the problems in securing PI insurance has been levied at all parties, at one time or another. In the past it has been law firms accused of leaving it too late to try and find cover" a dangerous approach in the current market. "Due to what happened last year, fewer law firms will leave things to the last minute this time," says Derek Bambury, head of professional risk at law firm Browne Jacobson. "But we are only weeks away and I suspect some law firms haven't even begun to think about getting signed up."
However, others believe law firms have now learned their lessons but may still be hampered by insurers who are more selective with their risks. Pointing the finger elsewhere, Damian McPhun, insurance partner at law firm Halliwells, argues that risk-averse insurers have not been giving full rate quotes until nearer the deadline making it harder for firms to work in advance. "Many law firms have contacted their brokers early so they know where they stand," he says. "As far as the brokers are concerned they tell me they have been ready and waiting for a while and it is actually the insurers that have been holding things up, by saying they will only give rate quotes from September."
Others point towards the Solicitors Regulation Authority and its decision to persevere with the single date of renewal. The authority has actively encouraged law firms to begin their PI applications early but has only recently opened discussions with the Law Society to discuss a rolling renewal date.
Fixed date fiasco
Towergate PI managing director Alan Eyre argues that a fixed renewal creates an artificial and ultimately unstable market. "The renewal date should be changed," he says. "If it was spread throughout the year it would be a much more balanced market place and firms, insurers and brokers would have more time to understand individual risks better." And Mr McPhun argues that there is both the technology and resources available to make a change to the dates without too much difficulty.
"The single date was supposed to make it easier to tie cover in with the renewal of practising certificates. I always joke with the brokers that they do nothing for 10 months but then are frantic for two," he says. "With everyone focused on the same date people know where they stand but, with the technology we have, it would be easy for people to renew when they want, like other professions, and it might be easier to spread it over the course of the year."
Despite the fact that the SRA is consulting on this issue, it seems the organisation itself sees little problem with the existing structure. Andrew Darby, head of PI and client protection policy at the SRA, says that altering the renewal period would do little to soften what has become an increasingly tough marketplace.
"There is no compelling reason to move away from the fixed renewal date," he says. "In the soft market it served well, because insurers had to adjust their rates to stay competitive. It has now turned and moving to multiple renewal dates is not necessarily going to rectify the situation."
In spite of the finger pointing, what is clear is that any changes to the PI market will not take effect for this renewal and, with more than 500 firms predicted to enter the ARP on 1 October, future steps must be taken by firms to ensure they can gain affordable insurance in the future.
Mr Bambury argues that it is important for all firms to show that they have suitable measures in place to deal with risk. "You need to able to demonstrate a joined up approach to risk management. Most firms will encounter claims from time to time but if you can show why a claim, which may have been a problem, arose and have measures in place to prevent it happening in the future it will give reassurance to underwriters."
It has also been argued that firms should consider becoming Lexcel accredited in order to secure more favourable premiums. "Lexcel, in simple terms, is an accreditation" a badge of quality for law firms," explains Mr Bracher. "It shows that practices have achieved a certain standard. There has been an argument for some time that if a firm is accredited in this way they should pay a lower premium and it is slowly being recognised in the marketplace. Lexcel firms are getting some credit this year and are finding that their premiums are being discounted," he adds.
Soon, the 2009 renewal period will draw to a close and, if predictions are accurate, it will be the second year of hard market conditions.
The fact that XL, in conjunction with broker Aon, has joined the lower end of the market has done little to enthuse matters" especially with players like Travelers, Zurich and Quinn allegedly either disinterested in smaller firms or looking to hike up rates.
And there is talk of smaller law firms being compelled to join forces or even close their doors due to the rising cost of PI cover. "There are many firms looking to mergers as a way of addressing problems," says Ms Screech. "But firms should never consider a merger in a hurry. Poor claims experience of partner practices could worsen the prospect of an affordable premium. And there are some firms in the market that are realistically looking at the possibility of having to close their practice because of rising costs."
But the assessment is not universally bleak. According to Mr Bambury, 2011 could see the market turn once more and begin to soften. "Whether 2010 will be the tipping point remains to be seen but 2011 could be interesting for the profession and for the market," he says. "With more external investment coming in to the market and consolidated law firms bringing in risk management strategies, insurers may find they have to bring back competitive prices."
He concludes with a word of advice to his fellow lawyers: "I am sure there would be more insurers willing to cover firms, if they could only demonstrate good management and quality control systems are in place."
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