What brokers and insurers forecast for the PII renewal deadline

This is the time of year when professional indemnity insurers and brokers start warning solicitors that the market is going to harden and they had better smarten up their act. Get your proposals in nice and early if you want the best deals, has been the message; a message that hasn’t rung true – until now.

The profession had learned that there are some big discounts to be had if they leave it to the verge of the 1 October renewal deadline. Until last year, that is, when those who renewed late were in for a nasty shock, because either premiums went up or they ended up in the punitive assigned risks pool (ARP) for those unable to secure insurance. Law Society research found that one fifth of firms did not apply until September – and one in 20 did not apply until after the deadline had passed. One broker reports receiving 500 proposal forms on 30 September.

This year promises more of the same, particularly for smaller firms, given the state of the economy and the growing number of negligence actions – according to City firm Reynolds Porter Chamberlain (RPC), 80 claims against solicitors were heard in the High Court last year, a jump of 158% on 2007.

‘In previous years, because insurers were chasing premiums, you could get 10% off for every day of the last week of September,’ acknowledges Martin Ellis, head of the solicitors’ practice group at broker Prime Professions. ‘But the last couple of weeks of September last year were a very different story, especially for small firms. And this year, for the first time in a long time, I don’t think we’re in a phony war between brokers and insurers. The general feeling among the entire community is that insurers are going to stand fast [in demanding higher premiums].’

Jonathan Davies, assistant general manager in the professions team at insurer Travelers, says the approach has not necessarily been scaremongering in the past. ‘It’s always been the hope of insurers [to raise premiums], but it’s been pushed back by the market.’

In previous years, adds Simon Lovat, divisional director at United Insurance Brokers, capacity outstripped demand, meaning rates went down. But this was not the case last year, and though there is some new capacity this year, Lovat says it is on the fringe of the market.

Jenny Screech, legal professions manager at insurer Zurich Professional, says she will be focusing on the bottom line, not the top line, of how many firms are on its books. ‘Our aim is to have a stable and sustainable book, which means we have to increase premiums this year. We will take a more detailed approach than usual.’

Steve Holland, executive director of broker Lockton, predicts a possible division between firms of 25 partners and more – and the rest. ‘If [the former] can show they’ve operated risk management systems and have a long-standing relationship with an insurer, they may do better than mid-tier and small firms.’

Insurers are making it clear that their priority will be their existing customers. Firms that don’t like their existing insurer’s quote will need to think hard before turning it down or letting it expire if they do not yet have a better quote elsewhere. Davies says he is in the very unusual position of preferring to write less new business, rather than more.

Big squeezeThe consensus is that insurers are being squeezed at both ends of their businesses – payouts are going up, while investment income has dropped massively. According to many brokers, the appeal of the solicitors’ market to insurers has been less about profit – because no profession generates more claims – and more about receiving a big amount of premiums on 1 October to invest, knowing that any payouts are some way down the line. Davies notes, however, that payouts are becoming quicker.

‘If the market overall was making a 7-9% margin, I’d be surprised,’ says Lovat – and the average for other professions is around 30%. Ellis says: ‘Every insurer that writes this business has said to me for nine years that it’s the smallest margin they make on any professional market.’

Brett Warburton-Smith, a partner at Lockton, says: ‘All the insurers are talking about 10-15% increases, and up to 50% for some types of work.’

Conveyancing firms are clearly going to bear the brunt of this, along with company/commercial work – in which the size, rather than frequency, of claims is the problem – and commercial property. RPC partner Nick Bird says there has been a noticeable increase in commercial property claims in recent months.

After four successive renewals where the overall premium take for the compulsory layer of insurance fell by up to 10% each year, there was a 9.3% hike in 2008 to £226m – a figure which actually masks the true rise, says Holland, because of a massive jump in the number of firms that fell into the ARP – 160 against an average of 20-30. ARP cover starts at 27.5% for the first £500,000 of gross fees – not that many firms pay their premiums, says Holland. All the qualifying insurers are responsible for claims made against those in the ARP (in proportion to their market share) and this cost will be reflected in every other firm’s premium, he says.

Frank Maher, a partner at specialist law firm Legal Risk in Liverpool, finds ‘some irony’ in this because ‘we got rid of the Solicitors Indemnity Fund because of a perception that bad firms were being subsidised by good firms, and now we’ve got a system in which bad firms are being subsidised by good firms’. He reckons there could be as many as 500 firms in the ARP this October, though Lovat says previous experience indicates that one insurer usually swoops in late in the day. Meanwhile, the SRA is conducting a review of the ARP’s operation.

Insurers dislike having to pay for the ARP as a condition of being in the market, but have not previously complained too vociferously because of the relatively small number of firms in the pool. ‘The claims activity in the ARP is a concern, as is the non-payment of premiums,’ says Screech.

Davies at Travelers says all quotes the firm issues this year will attribute 3% of new premiums to the ARP, and that the SRA should be more proactive. ‘If you accept that some firms are permanently bad, rather than unlucky [to be in the ARP], then that should be a regulatory matter not an insurance one.’ He says Travelers has rejected proposals from the vast majority of firms that are later closed down – three or four years before the SRA took action.

Andrew Long, a member of the SRA board and chairman of its financial protection committee, points out that relatively few firms have ended up in the ARP over the years, compared to what was expected in 2000. He observes that it was created, at the profession’s request, so that solicitors could continue to practise for a period even if they could not find insurance. The SRA review will look at whether, nine years on, this objective is valid.

It’s a dateLaw Society chief executive Des Hudson says its survey shows that renewal went smoothly for 80% of firms in 2008: ‘They saw either static prices, modest increases or even modest falls.’ But for the remaining 20%, the market changed rapidly, making it hard to get cover at a reasonable price, or any price at all.

Some problems were not of solicitors’ making. The survey found that, of the 12% of firms declined cover by their existing provider, half were informed less than two weeks before the deadline, and in some cases these were firms which had applied in July. Even those which do receive offers may have to wait for them, because insurers often do not want to show their hand too early, giving competitors a chance to undercut them.

Hudson says the Society has proposed a voluntary code of conduct to set out what is expected of solicitors, brokers and insurers during renewal. He has met insurers’ representatives, but ‘people are not forming a queue to sign up at the moment’.

Another cause of delay is simply the fact that all 10,267 law firms in England and Wales renew on the same day, making it a huge logistical exercise for the main players.

The debate over whether multiple renewal dates would be better is an old and contentious one. Lovat believes the single date drives premiums up and quality of service down. But it can work for insurers and brokers, in that they only need to draft in extra staff once a year, and for the SRA, which only has to deal with the paperwork once a year.

One senior broker says this ‘frantic period’ enables insurers to dictate rates: ‘Firms have to do either what insurance companies tell them to do or risk falling into the ARP.’

But Andrew Jackson, managing partner of the FINPRO practice at broker Marsh, says the single date has served the profession well over the years by increasing competition. Successive falls in premiums show solicitors have had a good run with the single date but, as last year showed, it can also work against them.

Of course, more flexible renewal would not stop solicitors leaving it late if that is their tactic. Screech thinks that, though rolling renewal may lead to a more stable market – because insurers will have a better picture of their book of business, rather than having to guess what it will look like on 1 October – logistically it could be difficult for the market to change now. Ellis agrees, adding: ‘Firms which feel the pain would feel the pain whatever the renewal date.’

Hudson says this is a ‘finely balanced argument’, which the Society is discussing with the SRA. Chancery Lane’s thinking will be helped shortly by an actuarial report on the impact of the single date. Long at the SRA says work it has done indicates that a variable renewal date ‘is unlikely to make any significant difference in practice to how the market operates overall’.

But even if abolishing the single date were advantageous, it is unlikely to prevent premiums increasing as a result of more claims and the insurance cycle.

The big market news this year is the entry of Allianz, adding a big name to the list of qualifying insurers and providing extra competition. Holland says the company has one of the strongest credit ratings in the market and has invested in the claims side of its business as well. ‘They’re not just dipping their toe in the water.’

But Allianz won’t save everyone – Mark Carver, who joined from AIG to become its head of financial lines, explains that it is initially looking for around 200-250 firms of four or more partners, paying £10m of premiums. The reason, he says, is not an aversion to small firms but simply a lack of resources to handle the volume of enquiries caused by the single renewal date.

Carver says Allianz will examine any firm’s finances and claims over the past five years, a period that should ‘reflect the growth of the firm and where claims come from’. This cautious approach will be by no means unique. Solicitors hoping that a premium hike could be offset by it being calculated on an income that has gone down over the past year will be disappointed – insurers seem likely to look at the figures for the past two or three years when assessing the right premium.

A bigger premium will be the second part of a double whammy for firms that have seen income fall. This creates another problem for insurers. ‘The insurance industry has never been very good at credit checking,’ says Lovat. ‘The biggest challenge is the increased credit risk firms now pose because they don’t have the cash.’

Just at the time when credit is harder than ever to find, it is likely that insurers will be far more insistent on having full payment in advance this year, especially as the SRA’s minimum terms and conditions of insurance (MTC) – which qualifying insurers are required to adopt – do not permit an insurer to cancel a policy for non-payment once incepted.

Conveyancers faced premium rises last year over fears of growth in mortgage fraud. While not downplaying the issue, Hudson says: ‘We’re hearing an awful lot of noise about mortgage fraud but not a lot of fact. We’re hearing about lots of claims, but not payouts.’ Davies at Travelers says that, while ‘we have our arms full of mortgage fraud claims, not all of them are reserved yet and certainly not paid’.

This year the worry is lender claims, although Lovat says that, while the number of notifications has gone up, it does not mean the number of claims has. Banks are asking to see the solicitor’s file when the client has missed just two mortgage repayments, he says, which triggers a notification but is not necessarily a claim. Screech says lenders’ advisers are trawling files in preparation, however.

As well as property, Davies identifies two other areas of concern: ‘general recessionary deals going bad’, in which people try to get out of deals they have done by attacking the drafting of the contract, and banking work in the wake of the credit crunch.

Richard Brown heads the sole practitioners team at Prime Professions, the approved broker of the Solicitors Sole Practitioners Group. ‘It’s going to be a tough year,’ he says. ‘There’s restricted choice [of insurers], and sole practitioners don’t have the ability to pay the premiums that ease underwriters’ minds.’ Insurers will examine whom conveyancers work for, he says – property clubs and buy-to-let clients, for example, are higher risk than a straightforward clientele of local people. Those starting up their own firms after being made redundant will find cover tough to find, too.

Only a handful of insurers are now prepared to quote on small firms, but if premiums continue to rise, Andrew Jackson predicts, others might be tempted to re-enter the fray.

One way to lure more players into the market might be to soften the minimum terms and conditions – dubbed ‘the maximum terms and conditions’ by some – which from one perspective protect those who do not deserve protection.

‘A lot of the problems come from over-regulation,’ argues Lovat. ‘If a surveyor lies on his proposal form, or if an architect doesn’t pay his premium or if an IT consultant works as a structural engineer, they are not covered by their insurance. Solicitors are [in similar situations].’

Davies says the MTC require an ‘all-or-nothing decision’. With every other class of insurance, he explains, if he is presented with a risk he is unsure about, he might offer cover subject to certain conditions or exceptions. As he cannot do that here, ‘it’s easier to say no’.

Jackson knows of insurers which have decided against entering the market because of the MTC, but, as Ellis says, ‘no one’s forcing them to participate. Some insurers would say [the MTC] are onerous but these are the rules of the game’.

Interestingly, Bird says insurers are ‘being a lot more aggressive on dishonesty’ and instructing his firm to attack the MTC so as to escape paying a claim. The MTC have never been tested like this, he says, and though the SRA can force an insurer to cover a claim while there is such a dispute, ‘if you tell the insured why you’re not offering cover, some put their hands up’.

For Hudson, overall the market is ‘as satisfactory as can be given global economic conditions’. He would be ‘very loath’ to give up voluntarily the ‘unique level of consumer protection’ the MTC provide. It gives solicitors an enormous advantage and him the ammunition to argue with lenders slashing their panels, for example, that they are well protected in case of any problems. Though it is possible that insurers would take on riskier firms if they could cancel the policy under certain circumstances, he says there is a wider question of the extent to which the profession should temper the quality of the scheme.

As ever, renewal throws up a lot of questions, but this year is arguably the most uncertain ever. We will, however, shortly have some answers.

Choosing your broker

Solicitors are facing one of the trickiest renewals since they started purchasing their indemnity insurance on the open market in 2000, making it more important than ever to select the right broker and insurer.

There are benefits to establishing a long and good relationship with your insurer, but that should not mean blindly staying with the same one. According to Law Society research, 35% of firms found a new insurer last year, either because they had not been offered cover by their existing insurer (12%) or they had declined an offer (23%).

The single renewal date for all firms heightens the importance of both starting the process early and selecting the right broker – Jon Davies, assistant general manager in the professions team at insurer Travelers, says the pressure this produces makes it hard for firms to tell their individual story.

The Solicitors Regulation Authority publishes a long and non-exhaustive list of brokers, so how best to choose the one for you?

For Mark Carver, head of financial lines at Allianz, ‘the biggest thing a broker can bring to an insurer is a relationship’. Do you trust them? To which insurers do they have access? How many other legal clients do they have? What kind of firms are they? Carver says you want both broker and insurer to have experience of firms like yours.

The question of access to insurers is an important one to ask – not all brokers deal with all insurers, and some are tied to some degree, which can work for you, in that it can mean access to special deals, but also against you if you are not getting the full range of quotes you want. Simon Lovat, divisional director of United Insurance Brokers, says it is important to have a Lloyd’s broker because you will not otherwise be able to approach some insurers.

Tom Davis, business development manager at broker PYV, advises solicitors to look for the support of brokers with in-house claims-handling and risk management operations. Of course, firms go to more than one broker, but a scattergun approach is not necessarily helpful. Jon Davies says his record is 12 enquiries from the same firm through different brokers. Equally, Davis says brokers which ask smaller firms to appoint them exclusively may not be confident that their panel of insurers could beat the competition from a full-market exercise. Firms should be aware that by signing a sole letter of appointment, they are limiting themselves to that one broker.

Some brokers argue that locality comes first so solicitor and broker can talk face-to-face – organising proposal forms and understanding someone’s business over the telephone or by email is not an easy task. ‘Trying to organise proposal forms and understand someone’s business over the telephone or by email is very difficult,’ says one senior broker. However, Neil Casson, a director of broker FirstCity, says proximity is less important than a broker with access to the right people. He adds that you should find out if the broker does the work himself or farms it out to another.

Every broker has plenty of tales of some solicitors’ slapdash approach to proposal forms – handwritten, with crossings-out and sections left unanswered – which is surprising given that, after premises and staff, insurance is probably any firm’s greatest annual cost. ‘Don’t rush it,’ says Lovat. ‘You should come to the market as a buying professional.’

The Law Society is trying to improve behaviour in the market with a voluntary code of conduct to set out what is expected of solicitors, insurers and brokers during the renewal process, and a model retainer letter for engaging a broker. Talks on both are continuing with the insurance industry.

Neil Rose is a freelance journalist