From cover to cover

After the smooth transition from the Solicitors Indemnity Fund to the open market, Jeremy Fleming asks insurers whether there are any nasty surprises waiting ahead of renewalIt is difficult to imagine that little more than six months ago solicitors faced the biggest upheaval in the legal indemnity market for years.The switch from the Solicitors Indemnity Fund (SIF) to the open market saw a last-minute scramble by solicitors to get cover, and rumours of some firms arranging policies to obtain retrospective cover.

A hush has now descended on the indemnity world, but beneath the silence insurers are planning strategies to renew policies and offer fresh ones, which raises a number of questions.

The Gazette surveyed six underwriters and two brokers from both large and small companies on an unattributed basis to gain a frank impression of the way the market is looking six months post-SIF.

Renewal The first question is: when will insurers and brokers be looking to ask law firms to renew policies taken out last year? Five of our respondents were sure that this would take place next month and early June.

Only three respondents thought this process would happen in July.One insurer said some of its rivals would offer early renewal to fill their books quickly.

Although, strictly speaking, policies must run from September through to the following September, a loophole enables firms to arrange to foreclose their insurance policies and renew earlier.

This gives firms the benefit of being organised before the summer, and a price that avoids the risk of any sudden problems in the market that might cause premiums to rise later.

On the other hand, if markets are stable firms who renew early may miss out on any competitive premium pricing later.

Last year, there was something of a Mexican stand-off as the Law Society's joint venture insurer St Paul - which undertook to quote all sectors of the profession - held back in starting to quote; so did others who were waiting for St Paul to set the benchmark.Michael Seymour, the partner in charge of professional indemnity at top ten City practice Lovells, says firms deciding to re-arrange cover early have to take a view on the future of the market.One factor affecting this is recession.

Mr Seymour explains how a sudden downturn in the economy might affect the insurance market: 'There are two factors: first insurers may withdraw the extent of their underwriting in the market, making supply tighter on demand, and this causes prices to rise; secondly, if the recession causes claims to become more widespread, this too will cause premiums to edge up.'However, Mr Seymour is not a pessimist and says he has some faith in economists who say that 'you never have a real recession if you can see it coming'.

PriceThe burning question affecting the industry at the moment is the price of policies.

Last year, the benchmark set by St Paul, which inherited a major underwriting role from the SIF, was set at very reasonable rate.

Research commissioned by brokers Alexander Forbes showed that 73% of solicitors saved money under the new regime and predicted premium rises for this year (see [2001] Gazette, 22 February, 1).

So, where does the insurance market see the price going this year? Of the eight respondents, three said there would be a rise and five said it would broadly stay the same - save for a slight inflationary increase.

One insurer said that while overall price increases are likely to remain neutral, there would be rises 'where a solicitor has a poor claims record', and 'decreases where records are unblemished'.Another, who predicted an increase in premiums across the board, explained the rationale: 'In its last year of existence, SIF raised 250 million premium based on a global assessment of the cost of claims.

Yet at the end of last year only 149 million had been collected in the market.' According to this insurer, 100 million of cover has therefore 'gone walkies', and the price should therefore rise.

The only other underwriter to predict a rise said 'premiums will definitely increase', and it expects the increase to be about 10%.Despite this prediction, practitioners seem to agree with the majority in saying that rates will remain broadly the same.Perry Simson, partner in charge of City giant Clifford Chance's professional insurance, suspects that overall, for the first 1 million of cover, premiums will stay the same.

This is, he says, 'contrary to what I believed last year when I thought that the market had underquoted.

I was wrong'.He adds that they are likely to remain static because - whether rightly or wrongly - there is a perception in the market that claims notified to insurers since September are 'unlikely to blow a hole through premiums collected'.

Also, he says that some qualifying insurers are unhappy with their market share and will therefore be competing for more business.

New markets There was little evidence that the insurers will be pushing to gain more clients by movements within the market.

The market can broadly be divided into three segments: large firms (these are mostly City firms with more than 25 partners); mid-sized (ten to 25 partner firms), and smaller firms.

Most companies were cautious about whether they might spread their wings into new sectors.

Only two gave affirmative replies.

One insurer with a reputation for writing policies for the smaller firms indicated it would look to write at the larger end of the market this year.

Another insurer said: 'We will stay at the bigger end - it was more attractive last year and it'll stay that way.' Another insurer said it is looking at new markets but 'with no positive responses so far'.

This part of the survey is difficult to read.

Of all the cards in the pack, strategy is the one insurers will keep closest to their chests; so it may well be that such reticence indicates that some insurers are actually planning to swoop on the smaller firms and sole practitioners - sectors some suggest were under-targeted by insurers last year.

New players in the market Again this seemed to be an area of disagreement among those canvassed.

Five of the 35 qualified insurers wrote no policies last year, while 19 others wrote premiums of less than 3 million for a market share of less than 2% each.

This raises the question whether any of those qualifying insurers who kept their distance will now come forward and enter the market, theoretically increasing the competition.

It might be seen as wishful thinking by existing insurers within the market, but few insurers or brokers said that there will be any newcomers pitching in this year.One said: 'Robust appetites might change, but the view of those who didn't come in last time will be: "Who wants to take a slice of an already undervalued market?".' Another said its gut feeling was that the market would remain static, with those who kept out likely to stay out for longer to judge the market before making a decision on entry.

But three respondents did say that new insurers would appear on the scene.

Of these, one said that they would target the market for firms with more than eight partners, another said there would probably be only two newcomers who would move into the five-to-ten partner market, and the third said that if there were any, they would move into the sole practitioner market.

Market extras All the insurers canvassed said that service was the most important aspect of their client relationships.

Solicitors, unsurprisingly, put cost up there as a crunch factor in the Alexander Forbes survey.However, as the market develops, different insurers are marketing their services in a variety of ways.

Marsh FINPRO combines its indemnity practice with a strong presence in the personal injury insurance market, and it says that 'it is that mix that helps us to preserve good relations with our clients'.Kelvin Curran of brokers First City says the main aim for his company is 'to arrange for renewal for a number of clients as early as possible to avoid the rush at the end of August'.

He says that so far this has been received positively by the market.Brokers Alexander Forbes offer insurance policies which cover office losses not falling within the general indemnity ambit, and are focussing on sole practitioners, having received endorsement from the Sole Practitioners Group.Some insurers, like PYV, are keeping their cards close to their chest.

Chief executive Michael Rendell says it would be launching an innovative service 'nearer the renewal date'.At St Paul, the partnership protection aspect of its policies - offered last year to firms in the two-to-ten partner bracket - is seen as an important selling point.

The policy indemnifies such firms for 'loss of partner' costs in some cases.Marsh, meanwhile, seems to take a dim view of add-on policies, Andrew Jackson of Marsh FINPRO says: 'We've looked hard at the options and believe it should be kept simple, After all this is a licence to trade and we think trying to be too clever simply gets in the way.