Lowering the risk and the cost

With rate rises in indemnity cover on the cards, Jonathan Davies offers law firms advice on how best to minimise costs and obtain a good deal

After two years of the post-Solicitors Indemnity Fund (SIF) regime, most solicitors now realise two things.

The first is that the overall cost of professional indemnity cover has been far less than under the mutual.

The second is that this situation cannot last for ever.

It has been widely reported that there will be significant rate rises this year.

These are not at the astronomical levels cited in the sensationalist press, and are unlikely to take the aggregate price of cover from the current figure of 164 million to the 250 million raised by the SIF in its final year.

Still, few firms will be able to avoid rate rises altogether and some will face substantial price increases.

So what is happening and why?

First, good firms are still paying for bad.

This was one of the main criticisms levelled at the mutual system.

In the open market, underwriters have greater liberty to assess a firm's exposure to risk and to take its specific circumstances into account.

However, pooling risk remains fundamental to all forms of insurance, and even in the open market the majority of practitioners will still be adversely affected by the errors of the wayward few.

To date, there has been only a handful of firms in the assigned risk pool (ARP), the insurer of last resort.

Nine of these firms are in the ARP for the second year running.

Still, the ARP's losses, which are apportioned between the insurers in accordance with their market share, will inflate the profession's bill by around 2% for everyone.

This comes at a time when rates are rising generally across all classes of insurance.

Pundits may point to some of the catastrophic events of the last year, such as US corporate collapses and the 11 September terrorist attacks.

But a year ago the cyclical insurance industry was already moving into a 'hard market', a phase in which rates rise by more than the increased cost of claims and expenses.

Now, a rate increase is not the same thing as a price increase.

Insurers fix their underlying rates according to their best estimate of the likely cost of claims arising from different areas of work.

But a quoted price will take other factors into account which are specific to a firm, such as its gross fees.

So far so good? Well, not necessarily.

Claims are far from being a thing of the past.

Risk management may have become something of a buzz word over the past two years, but professional indemnity is a 'long-tail' business, and claims are now coming in from work undertaken two, three, four or even five years ago.

What is more, a raft of fresh conveyancing claims may well be near as the property market's boom years come to an end.

All of these factors are forcing rates and prices up.

So what can solicitors do to minimise the cost and to get value for money? First, do not leave things to the last minute.

Doing so could limit a law firm's ability to get a competitive quote.

Second, solicitors should ask how a premium has been calculated.

Those solicitors using brokers should check to see whether their commissions have been included in the premium quoted.

Third, solicitors should question exactly what insurers or brokers do.

In particular, are they dealing with claims in a cost-effective way?

In the current climate, no one can guarantee avoiding some sort of increase in their costs.

But with a discriminating approach to purchasing insurance, solicitors can avoid the worst this year and ensure that they get value for money.

Jonathan Davies is the product manager at indemnity insurer St Paul