The Law Society addresses some common member misconceptions about professional indemnity insurance as the renewal deadline approaches

This year the Law Society has been actively engaging with its members about professional indemnity insurance (PII) following the difficulties that some members experienced during last year’s renewal period. As a result of this dialogue, we have become aware of an increasing level of concern about the PII market. The Law Society is monitoring developments closely as we approach the renewal deadline for 2009–10. We will take steps to protect solicitors’ interests wherever possible. Nevertheless, we need to be realistic about our ability to influence the commercial-based system that we chose to adopt in 2000. Below are our responses to some common misconceptions about the solicitors’ PII market.

The Law Society sets the professional indemnity insurance rulesThe Solicitors Regulation Authority alone sets the PII rules that insurers and solicitors must follow. In reaching regulatory decisions or setting rules, the SRA acts independently of the Society. The Law Society regularly consults and lobbies the SRA about the content and enforcement of these rules to help promote solicitors’ interests.

Insurers, the Law Society and/or the SRA are profiteering from the assigned risks poolNo one profits from the assigned risks pool (ARP). While ARP firms are required to pay a higher premium than the market rate (up to 27.5% of a firm’s gross fees), this helps to ensure that solicitors use the ARP only as a last resort. It also covers the significant costs of running the ARP, which include claims made against ARP firms and firms that do not have PII at all. Qualifying insurers are required to underwrite the ARP in the same proportion as their share of the premium income from the mandatory PII cover. The ARP manager regularly provides the SRA with progress reports. These reports are public and include financial data.

The Law Society/SRA approves the qualifying insurersNeither the Law Society nor the SRA approve firms as ‘qualifying insurers’. To become a qualifying insurer, an insurer must simply be authorised to conduct insurance business in the UK and sign the Qualifying Insurer’s Agreement. The Financial Services Authority regulates insurers that are authorised to conduct insurance business in the UK and, accordingly, all qualifying insurers.

It is not an open market because so few insurers provide PII to solicitorsAny insurer that is authorised to conduct insurance business in the UK is able to sign the Qualifying Insurer’s Agreement to become a qualifying insurer. In 2008–09, there were 26 qualifying insurers. Qualifying insurers are entitled to determine their own underwriting criteria, so it is unlikely that all qualifying insurers will be willing to underwrite the full spectrum of solicitors’ firms.

The Law Society/SRA should tell qualifying insurers how to underwriteThe qualifying insurers are private companies that are entitled to employ their own risk strategies in deciding how to underwrite solicitor firms. The Law Society cannot dictate how they run their businesses. Even if we could, by doing so we would risk increased premiums and deterring insurers from underwriting solicitors altogether. Solicitors should therefore take steps to minimise the risk they pose to the insurance market.

The Law Society/SRA should make qualifying insurers lower their premiumsAs with underwriting approaches, the Law Society cannot force insurers to lower their premiums. Competition pressures insurers to keep their premiums down. Nevertheless, insurers are likely to increase their premiums in a hardened market to try to recoup higher level claims and other losses in the normal market cycle.

A 'clean' claims history should guarantee a low quoteA firm’s claims history is only one of several risk factors that insurers consider when assessing a firm’s proposal form. In a hardened market, insurers are likely to increase the premiums of all clients to recoup losses or expected losses arising from increased claims and/or ARP contributions. It is therefore likely that most firms will have to pay higher premiums in a hardened PII market, even if they have not made any claims since the last renewal.

The Solicitors Indemnity Fund would have avoided the problems seen last yearUntil 2000, solicitors were subject to a compulsory PII scheme, called the Solicitors Indemnity Fund (SIF), which provided PII to all firms in private practice regardless of their practice area, size or claims history. In the late 1990s, the profession voted to move to an open market solution rather than a compulsory risk-policy approach. Since this time, the solicitors’ premium pool – the aggregate premium amount that solicitors’ firms pay for the minimum mandatory PII cover – has significantly decreased. (Up to October 2008 - the last date for which figures are available.) Even though the market hardened last year, the premium pool remained substantially lower than it was under SIF. It is a moot point as to the willingness of the entire profession to return to such a scheme.

ConclusionWhile the qualifying insurers ultimately decide whether or not to offer your firm PII, there are several steps that you can take to maximise your chances of obtaining it at a reasonable cost.

The Law Society has issued a range of guidance material about the PII market and the buying process. You can access this guidance, along with updates about our future initiatives at www.lawsociety.org.uk/professionalindemnity