500 firms to enter assigned risks pool at indemnity deadline
A record 500 firms are set to fall into the assigned risks pool (ARP) today, as the deadline expires for professional indemnity insurance (PII) renewal.
This means around one in 20 law firms will be forced to spend a quarter of their fee income on emergency PII premiums.
The ARP, the mutual insurer of last resort, provides emergency cover for firms unable to buy PII from commercial insurers. Premiums cost up to 27.5% of a firm’s turnover if they apply to enter the pool in time, or up to 47.5% if they do not. Firms in the ARP are also required to pay for inspection and monitoring by the Solicitors Regulation Authority.
Small firms, particularly in the conveyancing sector, are likely to comprise the bulk of the swollen pool, but the PII crisis looks set to claim a bigger victim. A large non-conveyancing firm within the top-150 firms was preparing to enter the ARP today, one reliable source suggested.
A number of firms have already chosen to shut down ahead of the 1 October renewal deadline to avoid paying the massively inflated premiums set by commercial insurers (see [2009] Gazette, 17 September, 1). The crisis has also led many solicitors, insurance brokers and insurers to call for the single renewal date to be scrapped.
The Association of British Insurers (ABI) said that it and its member insurers have been warning the Law Society and the SRA about a crisis ‘for some time’. A spokesman said that while the ABI hoped that those responsible ‘will approach reform to the market very seriously indeed… the signs, thus far, are not promising’.
Chancery Lane announced last week that it had written to the ABI and insurers asking them for an ‘urgent response’ to its concerns over ‘hugely inflated’ premiums.
If they meet ARP application criteria, firms with a turnover of up to £500,000 pay a premium of 27.5% of fees. After more than 24 months in the ARP over any five-year period, firms are closed down.
Comments
I am told that the abolition
I am told that the abolition of the single renewal date will decrease competition between insurers (as they scramble for business up to 30/09) and lead to increased premiums
Scrap the single renewal date
Why doesn't the profession get it? The single renewal date's anti competitive. If it was a good system wouldn't other professions buying PII cover (accountants, surveyors, architects etc etc ) have the same? Other professions don't have this problem. And don't listen to any 'vested interest' arguments to preserve it - the champagne was flowing last night as insurers rightly celebrated a fantastic solicitors PII season! This is a law society / SRA problem, not the insurers.
Get real?
Of course the single renewal causes unncessary problems - it may not be the only cause, but it is a major contributing factor. As things stand, it could all happen again next year.
PI Renewal
PI renewals are not seen as a problem for the insurance industry.
The Insurers are delighted with the outcome of this PI season, one stated that they had acheived their objectives"we have reduced the number of policy holders by 50% and doubled our premium income"
When will the Law Society and the SRA realise that they are being outsmarted by an industry who are very clever in playing "the game".
Pii Renewal
I wish to receive any support for my strongly held view that we should now band together to require TLS to mount a serious challenge to the SRA handling (mis-handling arguably) of the renewal fiasco. I feel confident that with the requisite support, we can bring about substantial changes, to the benefit of the Profession.
My email is Rodney@MillerGardner.co.uk
Causes of the PI Renewal Crisis
I think we need to be wary of assuming there is one single cause or one simple answer. We all need time to reflect on the reasons for the problems this time and the profession needs a considered and measured response to the issue, because it may well be repeated next year and may even be worse; it may also affect larger firms in future.
The following points are not my final thoughts but may set the ball rolling.
1. Some of the firms badly affected, but not the majority, deserved to be caught out. They had been too busy making money in the good times to supervise their staff. Poor conveyancing practice by unqualified staff with no supervision was a major cause of problems. But I know there were firms with no claims experience who could not obtain cover either.
2. Some insurers’ premiums were artificially low in previous years, and the substantial increases those insurers imposed this time were merely redressing the situation.
3. We have the widest cover of any profession in the world, but it is a Rolls Royce, and most people cannot afford one at the moment, perhaps settling for a BMW, a Mondeo (or may be a Trabant). The breadth of cover is intended to protect clients, solicitors and their staff (Swain v Law Society) but far exceeds the protection of other professions, and financial institutions; the cover provided by the Financial Services Compensation Scheme in many cases is risible by comparison, despite recent changes. Particular issues are –
a) Insurers’ liability to pay the excess if the firm does not pay – this precludes smaller firms in particular being offered more imaginative solutions, which might have helped those with problems, either because of claims issues or practice areas (principally conveyancing). We have worked alongside some medium- and larger-sized firms’ brokers to obtain cover for some medium size and larger firms, but the financial security of the small firms is generally not enough to make this a viable option;
b) Insurers’ liability to provide six years’ run-off cover, even if the firm does not pay the premium; the issues are the same as in (a);
c) The complete restriction on avoiding the policy or claims, even in the event of fraudulent non-disclosure; the reimbursement provision in the policy does not give insurers sufficient redress in the worst cases;
d) Cover for collapsing banks and loss of client account is potentially a disproportionate feature of cover, though perhaps less concerning than it appeared a year ago .
4. Could a Son-of-SIF be the solution? As a single provider, it would probably not be acceptable, and as a Qualifying Insurer, alongside the rest of the market, experience in Ireland suggests it may not be viable.
5. The single renewal date may have served us well, but it poses a high risk for the profession, particularly if an insurer were to collapse in the month before renewal, and it may well be past its sell-by date.
6. We cannot force insurers to be interested in our business, when they have their own businesses and shareholders to protect. Perhaps it is time to revisit the breadth of cover and ask whether it is still sustainable.
Causes of the PI Renewal Crisis
I agee with Frank Maher. The causes of this problem are numerous.
Insurers can be criticised for:-
1 Consistent underpricing of premiums in the past, resulting in income insufficient to cover claims being incurred.
2 Chasing market share at the expense of profitability. The loss of investment income enjoyed in the past hitting at the same time as an increase in the number of claims notified has forced a rethink this year.
3 Not being transparent about their individual claims experience. If brokers and solicitors knew and understood more about how an Insurer's book of business was running (including any Insurer they might be considering) Insurer hopping might reduce, allowing manageable premium increases to be charged and providing greater long term security.
Brokers can be criticised for:-
1 Not working with Insurers constructively when business introduced causes problems. If brokers helped Insurers to manage client expectations to secure premium increases instead of always seeking a new 'lamb to slaughter' greater stability would result.
2 Encouraging Insurer hopping to chase the cheapest premium year on year.
3 Creating 'exclusive' closed shop facilities without general broker access. The broker setting up the scheme can then work for hidden commission (probably with additional commissions based on profitability - something of a conflict of interest for a 'broker') the size of which adds substantially to the cost to the customer and cannot be scrutinised or challenged by the introduction of competition from brokers with a lower costbase.
Solicitors are responsible too:-
1 Viewing PI as a commodity purchase (in fairness, probably because of the way some brokers have sold it) and judging offers mostly based on premium.
2 Paying insufficient time and attention to the subject and leaving things late. We were still receiving proposals from clients in the last week of September.
3 Focussing on risk and claims management only at renewal time.
4 Ignoring potential benefits of continuity. One of our clients was told by its Insurer that renewal terms would not have been offered based on the claims record, if they had not shown loyalty by insuring with the same carrier since 2000.
The width of the minimum wording terms, the common renewal date, the run off obligations and financial exposures that the Law Society expect of its approved Insurers, are all a major concern to underwriters.
The PI insurance market can do better than this and delivers well to many other professions.
A possible solution might lie in:
a) Removing the common renewal date completely or perhaps having two dates to help in managing the volume of enquiries.
b) Reviewing some of the key features of the Law Society's minimum terms to improve the attraction of the business to Insurers.
c) A single market facility for smaller firms with all approved Insurers sharing the risk in proportion to their respective shares of the larger practice segment. Quotations available to all brokers, and premiums without commission would leave solicitors free to select the broker of their choice and pay a fee in line with the services being provided. More intrusive risk assessment would help promote fair premium differentials and encourage firms in looking for continual risk improvement.
If a tidal wave of claims from conveyancing arises a many Insurers expect, renewal in 2010 will be every bit as painful as 2009.