As the 1 October single renewal date for solicitors' professional indemnity approaches, Phil Foley explains the unique challenges this throws up for brokers and underwriters
The first of October is a date that will be ringed in red on the calendar of every insurance professional working within the UK solicitors' professional indemnity business. The reason being that unlike every other class of business, the entire solicitors' PI book renews on a single day: 1 October.
This concentrated renewal season leads to unique challenges and, in many senses, underwriting of the purest possible nature. Put simply, if it is not right on 1 October, the whole of the following year remains to pay for the mistake.
The reason for the single renewal date is the behest of the Law Society of England and Wales. The objective is one of attaining transparency, providing the Law Society with tight control on the compulsory purchase of PI and encouraging the insurers to engage in fairly aggressive pricing.
Mandatory cover has a tendency to produce a degree of price complacency, so undoubtedly the Law Society's thinking was that if all solicitors renew their compulsory PI cover on a single day, insurers will salivate at the prospect of an injection of around £250m net premium into the market - that is approximately £300m gross premium - and fight for market share. With around 30 insurers writing this specific cover - and carriers needing to be approved by the Law Society in order to do so - competition is robust, although not as cut-throat as some might imagine. The reason for this will be duly explained.
Solicitors' PI has always renewed on a single date although the nature of the market itself has varied. Some 30 years ago the class functioned very much as it does today with a range of specialist underwriters competing for the business on the commercial market. However, around 25 years ago the Law Society essentially took the scheme in-house and created a mutual insurance fund owned in conjunction with broker Bowrings and Minet. This mutual fund operated until the late 1990s when it began to run at a deficit, so an alternative was sought.
The business came back to the commercial market in 2000 with a 1 September renewal date, subsequently moved back a month in order to put some distance between the end of the summer holiday and the deadline to renew. In addition, the compulsory limit was raised from £1m to £2m (£3m for limited liability partnerships) from October 2005.
The renewal season gets under way in July when the first underwriters go to the market with what can be referred to as early-bird discounts. However, only around 10% to 20% of solicitors will take the bait. In August, activity increases with a further 20% to 30% renewing but the vast majority of binding will take place in September.
And so it goes on until 1 October, with the pace becoming more frenetic by the day. There is a short period of grace after 1 October for any stragglers, and ultimately solicitors unable to find cover will be placed in what is known as the Assigned Risks Pool, of which all insurers writing solicitors' PI take a share based on their actual market share.
While the single renewal date undoubtedly works in solicitors' favour in terms of pricing, it creates a number of challenges for insurers. With the absence of continuous renewals, underwriters have to set their rates at the start of the season as best they can.
Once renewed, the market cannot respond to major events in the way that other lines do; solicitors' PI was probably the only class of business in the UK not to be able to make any immediate adjustment after the terror attacks on 11 September 2001 as it had renewed for the year just eight days earlier.
Efficiency is perhaps the greatest challenge. With so much business being written, in such a brief period, many insurers rely on temporary staff to assist with processing and underwriting. This can impact on the quality of work so some insurers avoid this pitfall by embracing technology and using web-based systems for brokers that help alleviate the problem and allow instant management of workflow, from quotation and policy issue to claims notification and settlement. Experience indicates that this is one of the most effective ways of maintaining efficiency and customer service standards throughout the dramatic peaks of the summer and early autumn.
The reality is that the single renewal date works more in favour of the solicitors than it does the underwriters. If there is a downside for the solicitors it is that the quality of underwriting across the board may suffer because of the tight deadlines and high workloads. Underwriters by necessity have to take a fairly pragmatic view of the risks they are presented with and do not have the time to be as flexible as they might be in a continuous market.
As challenging as it is, the single renewal certainly encourages some tightly focused underwriting from the market with many insurers seeking profitable footholds in niches, such as smaller solicitors. This has led some market commentators to suggest good profits from solicitors' PI are rare but others would beg to differ.
While underwriting for market share in this class is a sure way to come unstuck, underwriting for profit is certainly possible by selecting niches and managing the challenge created by this unique style of renewal through web-based solutions. Solicitors' PI is a fascinating class of business - and one that will continue to make 1 October a red-letter day for solicitors and underwriters alike.
Phil Foley is senior vice-president at Liberty International Underwriters.
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