One in every five firms is shelling out at least 10% of turnover on insurance premiums, new research reveals today. Joint analysis from the SRA and Legal Services Board found that of those paying a higher proportion of their turnover, the vast majority are small firms. A disproportionately large number do property work.

Professional indemnity insurers told researchers that, although the hardening market cycle might begin to ease, costs are not expected to fall in the near term.

The regulators expressed their concern that the high premiums will either result in extra costs for clients or firms being unable to obtain cover and going out of business.

The report suggests that smaller firms may pay higher premiums because they are seen by insurers as representing a higher risk. The market structure might also give insurers more of an incentive to maintain larger law firms by keeping premiums low.

Anecdotally, firms reported that some insurers would not cover practices below a certain size, resulting in less competition in the market, although no evidence was found that this was a systemic problem.

Researchers found that a large law firm would pay almost £70,000 more in annual premium if they were charged at the same rate as a small firm.

The regulators commissioned Frontier Economics to analyse the available data on premium rates paid by solicitor firms. They also surveyed 915 firms in the second half of 2022.

The median value of premiums as a proportion of annual turnover was 5%. The 12 firms reporting values premiums above 20% all had turnover below £850,000.

The other driver apart from size of the firm was the proportion of turnover generated from property work. The median-sized firm paid an extra £20,000 in PII premiums when they do a large amount of work in property compared with firms that do a small amount. This amounted to 2.5% of their annual turnover. Firms doing a proportionately high amount of legal aid work also tended to pay higher premiums, as well as those weighted towards litigation, corporate work and wills and probate.

Again anecdotal reports suggested that some insurers would not cover firms doing a large amount of property work, but there was no wider evidence found for this.

Around a third of firms purchased extra cover and separate cyber insurance, at an average cost of 0.8% of turnover.

The regulators said they would work with lawyers and insurers to consider the findings of the research and see what more can be done to understand and support the market.

 

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