PII special: overview - sea change
Since moving to the open market in 2000, many solicitors’ firms have complained of professional indemnity insurance (PII) premium price hikes. As one anonymous lawyer put it: ‘Let’s not pretend that the insurers are some sort of benign force existing to help anyone. They are there to take premiums and avoid paying out if they possibly can. Insurance is pure market, and this one is rigged in their favour.’
Insurers have also grown frustrated that they are contributing to - and are liable for - risks they never wanted to cover in the first place from those law firms that have taken refuge in the assigned risks pool (ARP), a kind of ‘insurer of last resort’. Furthermore, insurers complain that the Solicitors Regulation Authority’s minimum terms and conditions - which came into force last year and express the minimum coverage firms must have in respect of their regulated business - are too restrictive.
David Sawyer, assistant general manager for professional lines at Travelers - one of the biggest providers in the legal PII market - says the ARP may have restricted the number of insurers that wanted to get involved in the market. ‘The fact that law firms could stay in the pool for two years was not necessarily a good thing for the insurance industry or law firms.’ These risks, he argues, were risks that no other insurer wanted to cover on the open market but under the scheme insurers have had to cover them anyway.
Those in both the insurance industry and the legal sector hope that changes coming into force will make the market more competitive for solicitors to source cover, while also reducing insurers’ exposure to risk and long-tail liabilities. The ARP is already being phased out, with the time a law firm can stay in the pool being cut from 12 to six months, pending abolition from October 2013. Although there will be a three-month extended indemnity period, in reality it only gives law firms a month to find insurance cover as otherwise they cannot take on new business.
The SRA warned that the 31 firms in the ARP at the start of the year would have to sell, merge or close by the end of the financial year. Several have since secured insurance cover, but in April the regulator said a total of 15 firms would be closed down after failing to find an escape route from the ARP. October 2013 will also see the end of the single renewal date, which means law firms will be able to purchase PII when it best suits them, and can potentially negotiate longer - and more attractive - terms. Russell Lane, managing director at insurance broker Brunel Professional Risks, says that since the SRA is allowing insurers to offer longer-term policies, the market is likely to see an increase in the number of two-year deals, which will offer more choice and flexibility for law firms.
‘At present, some insurers are interpreting the regulations to say that longer-term policies must have the same start and end date. While this would allow longer-term deals, it would preclude deals over terms such as 18 months. More flexibility would be very helpful as it would start a move away from the common renewal date that creates a huge bottleneck for law firms, insurers and brokers,’ says Lane.
Few insurers or brokers are lamenting the passing of the ARP and the further opening up of the PII market. ‘The ARP has long been a drain on the insurance market,’ says Ed Prescott, managing director of broker Prescott Jones. ‘Its removal will provide more stability for insurers because they are now more aware of the potential liabilities they face from the business they write.’ With the ARP, he says, it was always difficult for insurers to budget for future claims that might result from work carried out by those law firms in the pool rather than the policies the insurers had directly underwritten: ‘The end of the ARP is great news for solicitors,’ adds Lane. It has typically added up to 15% to the cost of premiums for all solicitors, he believes, and has also been a big disincentive for new insurers to enter the market. ‘Once it’s gone there will be a greater appetite for more insurers to enter the market and compete for solicitors’ business,’ he predicts. More competition, the argument goes, can only be good for law firms, as it will place downward pressure on the cost of premiums and provide greater flexibility and choice.
Some insurers have confirmed they are entering the market. First Title Insurance, a leading provider of legal indemnities in the UK and Ireland with A ratings from AM Best and Fitch, joined forces last year with underwriter INK Underwriting Agencies to offer PII to law firms for the first time. Wesleyan Assurance Society will be providing broker services.
Viv Williams, chief executive at 360 Legal, a legal membership organisation that has around 800 law firms, is among those who believes the ARP has deterred insurers from getting involved in the legal PII market. ‘However, now that the scheme is being scrapped we are seeing new entrants coming into the market and this is good news for small law firms,’ he says. ‘There is more choice and we think rates will soften further by the time renewals season comes around in October 2013.’
Prescott believes the ARP’s removal will bring more capacity and competition: ‘Insurers can now see a light at the end of the tunnel.’ Some are likely to be more selective about the kinds of risks they will cover, ‘but new "unrated" entrants may focus on that end of the market to pick up the business’.
Some industry experts say the legal PII market is unlikely to see much change at all until the ARP is scrapped completely in October 2013. David Simon, managing partner at Robin Simon, a specialist insurance law firm, says the ARP has been a ‘major drag’ on the PII market for years, ‘because insurers have had to cough up for run-off costs. Some insurers have even decided to stay out of the PII market until the end of next year when the ARP is completely gone’.
At the moment, the legal PII market is dominated by a handful of firms, in particular at the top end. According to figures released by the SRA, just four insurers secured more than half the market share of PII in 2011. More than 18% of law firms took out initial PII with XL Insurance, the lead provider in the market, for 2011/12. The next most prominent insurers were Hannover (12.5%), QBE International (11.8%) and Travelers Insurance (11.6%). In total, 10,917 practices operating in England and Wales secured compulsory qualifying insurance with a record-equalling total premium income of £255.7m. Just 32 firms failed to find PII on the open market by the renewal date of 1 October and entered the ARP, compared with more than 400 the previous year.
Travelers’ Sawyer says the insurer is focused on maintaining its strong market position in the wake of new entrants potentially taking market share. ‘We have built a position of being one of the top insurers for PII cover in the legal market and we intend to maintain that standing,’ says Sawyer. ‘Our underwriting criteria will remain the same and we will continue to assess risks on a risk-by-risk basis. We will look at a firm’s claims history and its internal controls and risk management.’
The arrival of new entrants may help to soften the blow of high-profile exits, such as Quinn Insurance’s departure in 2010. As a major underwriter of solicitors’ PII policies, Quinn’s exit forced hundreds of UK firms to look for new insurers. Some others are also not accepting new business - Ukrainian law firm Lemma Europe Insurance Company (which only stayed in the UK PII legal market for a couple of years) and RSA Insurance are two examples.
To provide greater reassurance to law firms about the provider they buy their cover from, each insurer must now tell the SRA and each client their credit rating as set out under the Qualifying Insurer’s Agreement approved earlier this year. However, following lobbying from the insurance industry, professional indemnity insurers will not be required to tell solicitors if their credit rating changes during the year of cover, on the grounds that this would be too onerous. Instead, insurers will only have to keep the regulator updated during the year.
Doing it yourself
The fact that the number of law firms in the ARP has fallen sharply suggests that the PII market remains competitive, and that even those law firms deemed to have a high-risk profile - such as those that focus largely on conveyancing - can get cover, though perhaps at a high price.
Sandra Neilson-Moore, managing director at broker Marsh and head of its PII practice for the 100 top law firms, says: ‘At the top end of the legal profession the market is still very soft, competition is very good and we expect prices to remain relatively flat for the next year.’ William Cooper, Marsh’s vice-president and team leader for small to medium-sized law firms, says that smaller firms are finding there are fewer players at that end of the market, and that rates are not as ‘soft’ - but that cover is still available.
It also appears that law firms are being more proactive about sourcing their own cover. A survey conducted by the Law Society, released in April, found that increasing numbers of law firms are seeking out their own quotes. The poll of 600 firms found that almost a fifth approached insurers directly for 2011/12 cover, which was nearly double the proportion that did so the previous year. But while more were prepared to go it alone, there was little impact on the average cost.
The firms surveyed - all with up to 25 partners - reported average annual premiums of £16,720, down from £16,980 in 2010/11. Few firms were unable to secure cover, with just 0.5% needing to enter the ARP. Almost two-thirds of firms chose to reinsure with their 2010/11 insurer, with larger firms more likely to stay loyal to the same provider.
Furthermore, brokers must disclose their fees and commission structures - though only on request. The Law Society is urging its members to ask their brokers for commission disclosure and has included guidelines in its new handbook for law firms (see box below).
The new handbook encourages law firms to get the best value out of their brokers. The Society will also stop publishing a list of solicitors’ PII brokers on its website and will instead refer its members to the FSA register and the British Insurance Brokers’ Association’s list of brokers, in part because some lawyers thought the trade body was vetting them before registering them, which was not the case.
Lane welcomes the move to increase transparency. ‘We’re very happy to disclose all our fees and commissions, and we think it’s a good idea for insurers to reveal their ratings,’ he says. But Lane adds that ratings do not guarantee assurance. ‘We’ve seen rated banks and insurers go bust in the past, so a rating is only a guide to financial security rather than a guarantee,’ he says. There is, he adds, also a shortage of rated insurers writing cover for one-to-three partner firms, which means that these firms need to look at unrated insurers if they want a wider choice.
Philip Steel, risk management and claims consultant at Wesleyan Assurance Society, also believes that increased transparency about fees and commissions is welcome, and that information about ‘rated’ and ‘unrated’ insurers is a step in the right direction: ‘Our advice is that solicitors should look at the whole open market, and if the best deal is available from an unrated provider they should discuss the risks and options with their broker, and then make a fully informed decision whether to go with a rated or unrated provider.’ He adds: ‘I don’t think that insurers will need to change their approaches to underwriting.’ But he does believe brokers will need to be much more transparent about how they charge their fees and commissions as price could become a big differentiator as the market opens up. ‘Fee transparency may also become increasingly important when the single date for renewals is removed. This might prompt some law firms to negotiate insurance cover for longer than the usual 12 months, and premiums - and fee structures - may become a bigger issue then,’ he adds.
Yet while there may be a greater onus on the insurance industry to disclose more information, it is incumbent on law firms to disclose more information about the risks facing their businesses, and how those risks are being identified and managed, if they want to secure cheaper premiums.
Sandra Neilson-Moore, managing director at broker Marsh and head of its PII practice for the 100 top law firms, says some of the complaints from solicitors that insurers are ‘just bumping up’ their premiums are unjustified. ‘Insurers price risk on the information they are given, and there are still many law firms that provide poor details in their insurance submissions,’ she says. For example, she adds, there are still too many cases of law firms not answering all the questions in their insurance forms ‘or not answering them properly, submitting illegible forms rather than filling them in online or sending them via email, and not providing details about their financials, the kind of work they do, or their management of risk’. These details are important, she notes, but some law firms ‘perhaps do not grasp the significance they can have [for] trying to gain cover’.
Chancery Lane: no room for complacency
The Law Society remains upbeat about the ability of practitioners to find affordable PII cover, but warns that law firms should check insurers’ ratings and demand full disclosure from brokers. ‘The outlook for this year’s professional indemnity insurance period is positive,’ says Law Society chief executive Desmond Hudson. ‘We expect to see new entrants, including rated insurers covering the smaller end of the market, which is encouraging as this segment has experienced difficulties in the past. However, the Law Society is not in the business of being complacent. Year on year, it has widened its suite of PII guidance and support for solicitors and this year is no exception.’
He adds: ‘We are once again offering a special PII package for Conveyancing Quality Scheme and Lexcel-accredited firms to help them gain access to quotes for coverage that reflects their accreditation. Our PII Insurers’ and Buyers’ guides are both vital tools for all firms in this year’s renewal period, and within the Buyers’ guide we are urging solicitors to seek from their brokers details of any commissions and fees they receive in the interests of transparency.’
For the first time, this year the Society has provided members with a composite PII proposal form. ‘This is the first step towards a common proposal form that will one day mean an end to solicitors having to repeatedly provide the same information to different insurers. Our aim is to have one form that all insurers and brokers accept,’ says Hudson.
At the end of June, the Law Society published a list of brokers and insurers accepting its composite proposal form. So far brokers Aon, Bar Professions, Brunel, Giles Insurance, Hera Indemnity, Howden, Marsh, Prime Professions, QPI Legal, Wesleyan, and Windsor have indicated that they accept the form, though some require supplementary information. Insurers accepting the form include APRO Management, Chartis, First Title, Hannover, Indemnity Risk Solutions, Liberty, Monitor Insurance, RSA Insurance (not accepting new business), and WR Berkley. Some may require more information and others will still require their own forms to be completed before they give a final quotation.
The Law Society has launched its 2012 guide to insurers, which includes a new section on insurers’ financial security ratings. It will be updated throughout the renewal season when new insurers enter the market. More details can be found on the Law Society website.
William Cooper, Marsh’s vice-president and team leader for the small to medium-sized law firm sector, adds that those firms which have had multiple claims in recent years will find it increasingly difficult to find the necessary cover. ‘Those firms that are still getting high premiums need to take a look at themselves; their attitudes to risk and the way they run their business says a lot more about them than how the insurance market operates,’ he says.
Better risk and financial management, and internal control have been areas that the Law Society and the SRA have been keen to promote. Principle 8 of outcomes-focused regulation states that law firms must ‘run the business effectively with proper governance and sound financial and risk management principles’.
Steel says the removal of the ARP will force firms to accept that ‘risk management is not a "nice to have" accessory for their business, but an essential part of it’. ‘If law firms can’t find available, affordable or adequate insurance cover, then they will need to ask themselves why. Insurers will only insure those firms they want to,’ he adds.
In April, the Wesleyan for Lawyers brand announced plans to offer a new PII broking service which will be dedicated solely to lawyers and offer year-round support and guidance, including a claims consultancy service. Wesleyan will offer access to a select panel of A-rated insurers. ‘It is not within our business plan to offer unrated insurers,’ says Steel. For the first year Wesleyan is trying to attract firms with between four and 25 partners. But Steel adds: ‘We want law firms that take risk management seriously to be our clients, so we are looking for firms that have ISO9001 and/or Lexcel accreditation, or firms that are looking to become accredited with these standards.’
Williams says: ‘Law firms are still not particularly good with regard to internal control, but they are getting better and removing the ARP safety net will help improve their focus.’ While Prescott concludes: ‘There will be a strong focus on how well law firms understand their own risk management. Those who get to grips with it by the time of the renewals season next year will definitely be in a stronger position to get lower premiums.’
Neil Hodge is a freelance journalist