The rising tide

While increased indemnity premiums hover over lawyers like a dark cloud, Jeremy Fleming talks to insurers who are advising firms to sort out cover quickly and predict that this year more firms face the prospect of the assigned risk pool

Solicitors react to the annual renewal of their indemnity insurance with the enthusiasm of a five-year-old going for a dental check up.

This year the profession has been warned to expect painful treatment.

Recent reports agree that the price of premiums is set to rise this year, with estimates varying between 25% and 300%.

There are two reasons for this increase.

The first goes without saying, and every claims manager in the City will trot out the same list of ailments: a hardening market, tightened insurance capacity following the massive hit in the wake of the 11 September terrorist attacks in the US, Enron, Worldcom, and reeling stock markets.

The second reason is that, as the open insurance market system enters its third year following the dissolution of the Solicitors' Indemnity Fund (SIF), claims records are beginning to illustrate trends, which may have an adverse effect on how firms with poor records are treated by their insurers.

There is good news for solicitors who fail to renew their insurance policies in time for the 1 September annual deadline this year.

The time period for which underwriters may backdate policies once they are in place has been increased from 30 to 60 days.

Last year 100 firms left it too late and missed the - then 30-day - backdating limit.

To their embarrassment, they found themselves in the assigned risks pool (ARP) for a punishing few weeks.

But despite the longer period for late firms to renew, nobody is recommending that practices delay getting their policies this year.

David Coughlan, head of claims at Zurich Professional insurance - one of the two biggest players in the indemnity market with the St Paul - says: 'The key thing this year is for firms to get their quotes in early, because as the summer wears on the capacity in the market will become more limited, pushing prices up.'

Mr Coughlan says that average rises will range from between 30% and 50%.

He adds that firms should be especially careful to fill out their application forms for renewals and to include all details that show the extent and efficiency of their risk management systems to limit increases.

Ceri Welch, professional indemnity product leader with Royal Sun Alliance, says: 'The solicitors' market has not got the best loss record at the moment, and we are looking to balance our cover of them with those of other professionals to spread the risk.' He adds that - in spite of what the general public might think in light of recent corporate scandals such as Enron - solicitors have a worse record than accountants.

Mr Welch is predicting premium rises of between 50-60% this year, with higher rises for those firms which have incurred more than average claims in the past year.

Jonathan Davies, Product Manager for solicitors' professional indemnity at St.

Paul, says: 'We expect to see rate rises across the market of between 20% and 50%.

Solicitors should not assume that these will automatically translate into price increases.

There is a difference between rates and prices.

Prices take a firm's specific circumstances into account, such as growth in fee income.'

He adds: 'To get a quote from a quality insurer of your choice, don't leave it to the last minute.

Insurers will be under a lot of pressure in August.

This is because news of rate rises has caused firms to seek quotes from more insurers than in previous years.

Many two-year deals from 2000 are also renewing this year.'

Trevor Moss, director of Alexander Forbes Professions broking, predicts that despite the fact that premiums will rise this year, they are still likely to be below premiums charged by the SIF in 1999 - its last year of operation.

He says: 'Premium income in the open market was 175 million in 2001 compared with 250 million to SIF in 1999.

Even a 40% increase this year will still keep the open market costs below those of SIF in 1999.'

Mr Moss adds that if the SIF were still in being, its equivalent costs today 'could easily exceed 300 to 350 million'.

At broker AON Professional Risks, the newly appointed executive director Liz Mullins, who formerly worked with the SIF and subsequently with underwriter Zurich in the open market, echoes the warnings.

She says: 'There will be problems with high excess layers and brokers will be put to their mettle in a market that is contracting.'

However, firms should not be distracted from shopping for the best deal.

Peter Farthing, a partner with City firm Clyde & Co and chairman of the Law Society's indemnity committee, says: 'Talk of huge premium increases are often indicative of insurers talking the market up.

We have created a free market in insurance.

But it is up to solicitors to use it by shopping around.' He suggests that solicitors with no claims should hope to bargain for premium rises not exceeding 35%.

After a year that has seen the collapse of insurer the Independent - which went into receivership last year, leading to a Serious Fraud Office investigation - over-shadowed by huge US corporate scandals, solicitors should satisfy themselves of the reliability of their insurers this year.

Mr Coughlan says: 'We are finding that security is a much bigger issue for our client firms.' He says that the relative security of a large international company such as Zurich gives customers maximum security.

But no one needs to be told that size is no guarantee of probity any more.

Solicitors should satisfy themselves that wherever they are insured, they are as happy as they can be that the insurer will not explode in a puff of accounting smoke the next week.

Apart from the Independent, Cox and Liberty have also left the indemnity market in the past year, but new players are also appearing.

American Re, which is underwritten by global insurance giant Munich Re, is entering the market.

Mike Rendell, marketing director for broker PYV, says: 'American Re is looking to write about 15 million cover in the market, which is a fair amount for their first year, considering the fact that CGNU - which wrote 13 million last year - was the fourth largest insurer in the market.'

Nick Pointon, who is in charge of solicitors' insurance at PYV, also advises firms to get in early this year.

He says: 'Firms should look to get their primary cover policies - the first 1 million of cover - organised early, but leave excess layers, where the premiums are likely to jump sharply later, to when the competition has started to bed down.'

Both Mr Rendell and Mr Pointon advise sole practitioners to approach the insurers direct for quotes, 'because there is less value to be obtained for them in using brokers'.

Stories of huge premium increases seem to apply to excess layers rather than the primary 1 million cover.

Mr Welch says: 'It's at the higher levels of cover, between 10 and 90 millions that the prices may go up by considerably more than 60%, possibly as much as threefold increases.'

All players are agreed that this development will make self-insurance - such as the creation of offshore captives - a serious issue on the agenda of the larger City firms this year.

But offshore captives will be far from the minds of those firms that find themselves in the dreaded ARP if they cannot obtain cover in the market.

And it is widely reckoned that there will be many more of them by the end of the year.

Mr Davies says: 'The amount collected from firms in the ARP will not cover the cost of their claims.

So even though the number of firms in the ARP is small, the profession is still subsidising it.

ARP losses will inflate the profession's indemnity bill by at least 2%.'

But he adds: 'We believe a tenfold increase in the number of firms in the ARP this year is entirely possible.' Which would clearly make the issue of knock-on increases for the profession even more relevant next year.

Mr Coughlan also thinks that the ARP is likely to grow, and he is unhappy at the current rate of unpaid premium: 'Around half the firms in the ARP have unpaid premium outstanding.

This must be premium collected.

There needs to be greater monitoring of the ARP and a full review of it would accelerate this process.'

Clearly more will be heard on this issue long after the toothache of this year's renewal season has worn off.