As law firms renew their professional indemnity insurance, increased competition in the underwriting market has held out the prospect of discounts being available. Yet, as Jeremy Fleming reports, quality of work could influence the type of rates set

The season for professional indemnity insurance renewals has come around again. But solicitors worrying about replenishing their cover before going away for summer holidays can take solace from the later deadline introduced last year, which gives them until 1 October to have new insurance policies in place.

The extra breathing space will be particularly useful this year, because for the first time since the demise of the Solicitors Indemnity Fund there seem to be real prospects that firms in certain sectors can achieve discounts. That possibility has been enhanced this year by new entrants coming into the underwriting market, sharpening competition after three years that have seen relatively steep rises in prices.


However, the leading underwriters are not predicting discounts. David Coughlan, the head of solicitors’ professional indemnity at Zurich Professional, says: ‘We still don’t feel that the total solicitors’ indemnity market is paying enough to cover the total claims and make a profit.’


Mr Coughlan says that while the level of premiums may differ from firm to firm depending on claims records and perceived risk and the size of firms, rises on the cost of premiums of 10 to 15% this year will broadly reflect the whole market.


Justin Bowen, UK professional indemnity manager at Hiscox Insurance, agrees: ‘In aggregate, rates are still not at a sustainable level across the market. Specific sectors are performing better than others and this is reflected in the rates we are looking to achieve.’


He says: ‘Broadly, for one-to-four partner firms we are looking to achieve around a 20% rate increase, in the five to 25 partners’ sector we are looking to achieve increases between 10 to 20%, which is similar to the level we want to achieve on practices larger than 25 partners.’


A spokesman for the St Paul says: ‘There is some evidence that the profession as a whole is still not paying what it ought to cover the likely cost of claims but this certainly doesn’t affect every firm.’


As this suggests, there may well be wiggle-room for firms this year, and brokers are painting a less broad-brush view of the likelihood of increases. Nick Pointon, the head of solicitors’ professional indemnity at broker PYV, says that sole practitioners might see rises of about 15%, but firms in the two-to-four partner bracket may see some better deals if they look around. However, if they do not he predicts this band could incur rises of up to 20%. But in the bigger firms the news might be better, he suggests, and with some softening in the market for firms with more than five partners, some firms might achieve reductions. Of course this always depends on the particular circumstances of the firm.



But with the entry of a Lloyds syndicate claiming to offer – through brokers Howden UK – an average reduction of 20% on existing premiums for 200 firms within the four-to-ten partner band, competition could heat up (see [2004] Gazette, 8 July, 4).



In addition, Martin Ellis, director at Alexander Forbes Professions, says: ‘We’re anticipating that a number of qualifying insurers who have traditionally been active in the five-to-20 partner market might start to look at larger firms of up to 50 partners this year.


‘This will increase competition and provide increased choice to firms, which is very healthy for the stability and long-term sustainability of the market.’


But he stresses: ‘The size of firm will not be the determining factor in identifying which firms will see better or worse premium rates in 2004; instead quality will be the key. The winners will be the firms which can demonstrate high standards of practice management and risk management. Indeed, insurers are becoming increasingly keen to see that firms have completed risk audits to identify areas of risk within a practice and have then acted to mitigate any potential losses.’


Peter Farthing, a partner with City firm Clyde & Co and chairman of the Law Society’s indemnity committee, says: ‘It’s important to remember that many insurers relate the cost of premiums to firms’ turnovers. So a policy that rises in cost might simply reflect a firm having increased turnover, and this would not be considered a real increase in price by insurers.’


Mr Farthing says: ‘I am delighted the market is seeing new entrants. Firms should always shop around for good deals, that is the way to make the most of the free market.’


The bigger players seem unconcerned about the new arrivals. The St Paul spokesman says: ‘New entrants may be focussing on excess layers but this is a complex market and we don’t imagine that [the newcomers] will cover large amounts of the primary [£1 million] of compulsory cover.’


Mr Bowen says: ‘The best way for new entrants to attract market share is by under-cutting existing insurers and picking a sector where they think this is possible to do profitably. But there are very few segments which can be heavily discounted if an insurer wants to write business for the long term.’


Mr Ellis adds: ‘Many of the new underwriters will also have less experience of the solicitors’ market and their ability to manage claims may not be as finely tuned as some of the more established underwriters. This means that firms will need to be aware that they may need a more hands-on approach with their insurer and they will need to be sure that any premium savings are not eaten up in increased management time.’


Timing of renewals may also be an issue this year, as the later renewal date beds down. Mr Pointon says the decision last year to shift the date for renewals back to 1 October may result in a dissected market this year, with a tranche of firms renewing early, during July and August, while others leave it to a later renewal in September.


This could leave firms in a quandary, according to Mr Pointon, who says: ‘I think there could be a substantial swing in prices. If prices are very cheap this month and next, there could be a sharp correction in the September market. Whereas if the market is high during the first period, it could go south later on.’


This could see firms quoted a good price early on, but allowing the quote to lapse in the expectation of a better quote later, and getting a shock as they receive a quote exceeding the first one by up to 40%. As Mr Pointon says: ‘It will be difficult for firms to decide this year whether to stick or twist.’


Mr Bowen says: ‘This year we early-renewed a considerable chunk of the best risks in our book. This enabled us to process this business at a lower cost than we incur during the normal renewal season and we passed this on to our customers as premium savings.


‘We calculated that this was over £500,000, around two-thirds of customers took this up, saving themselves £330,000. We were very pleased with the result and the savings we were able to make for our customers and would hope to repeat this again next year.’


Mr Ellis says: ‘Some underwriters are offering early renewal terms to a number of their better risks and many of these may benefit from lower rates – although increases in the firm’s fee income may in some cases mean that the final premium they pay is higher than in previous years.’


As for the larger firms, all the indicators are that they are increasingly looking to the captive-cell off-shore market for the excess layers of their insurance.


Mr Pointon – whose brokerage company has a sister called PYV Captive Solutions – says: ‘With premiums where they currently are, firms with low claims records are bound to be interested in single-cell captive insurers.’


He says that the price of administering these captives has now come down, and that firms with more than 25 partners are big enough to consider using one.


The St Paul spokesman says: ‘Captives are not an alternative to insurance, they are a funding mechanism in relation to claims firms are sure they will incur. So whilst they are suitable to deal with in-fill for the excess of policies, they do not cater for insurance proper – which is for claims firms do not know they are going to have.’


Mr Bowen says: ‘I am aware of a number of practices in the top 100 firms looking at captives as an option. It’s fair to say that those considering it most seriously are practices in the top 50 firms, where this method of risk transferral is most suited. For any large, well-run practice it is something that should be considered.’


Mr Ellis says: ‘The vast majority of the top 100 firms have considered the advantages of captive insurance arrangements and a handful have taken the plunge. With increasing deductibles, more firms have considered that this route offers a cost-effective solution to the financial management of risk.’


So, after four years of a free market for indemnity cover the open market for indemnity insurance is beginning to show signs of sector-specific activity both in terms of price, and methods of insurance.