Berliner’s exit from the PII market has created turmoil for 1100 law firms, providing a dramatic end to a troubled PII renewal season
This year’s indemnity renewal date, 1 October, could be the catalyst for a market shake-out. The 1,100 law firms who are understood to have transferred their business to unrated insurer Berliner, following unrated insurer Balva’s move to regulator-ordered liquidation, have been left with a fortnight to find cover following Berliner’s exit. Or they face going into run-off according to a fixed timetable.
Depending on how the market responds, a year from now there could be fewer firms paying (in many cases) more for cover. There may also be a negative impact on particular practice areas – such as conveyancing and personal injury – where insurers judge a firm to be too greatly specialist and therefore higher risk.
The timing of Berliner’s announcement, in a letter to client firms on 9 September, could hardly have been worse. While stating that the insurer has been ‘working closely’ with the Financial Conduct Authority, the letter from Berliner’s broker Apro indicated that the interests of policy owners could not be served by Berliner.
‘On 2 September 2013, we contacted you in relation to Berliner and advised you that we would no longer be accepting premium for Berliner for the underwriting year commencing 1 October 2013,’ the letter stated. ‘We are now writing to inform you that there is now uncertainty as to whether Berliner will, after all, be in a position to accept any solicitors’ PI risks for the year beginning 1 October 2013. Therefore the premiums we have already received will be held in a client account to those clients’ order, while we seek to resolve the situation. We consider however, there is some doubt as to whether replacement capacity can be secured in time.’
Solicitors in receipt of such a letter could be forgiven for thinking that matters are truly grim when the meaning of a letter written using euphemistic and emollient language is so clear.
‘It’s a serious issue,’ said United Insurance Brokers’ Simon Lovat. ‘1,100 practices coming into the market to buy PI insurance 15 working days before renewal poses a significant challenge to brokers and insurers, who are already working at near capacity.’
Firms who cannot find cover will go into the Extended Reporting Period and, if they are unable to find cover, may go out of business. Paul Crilly, account director for broker RK Harrison’s UK professional risks team, commented: ‘We don’t know how this situation will evolve, but the reduction in capacity across the market, particularly at the unrated end with the withdrawal of Balva and Berliner, will certainly put pressure on smaller firms.’
But while the result might be a scramble for cover for hundreds, Berliner’s altered position – though dramatic – is in line with market trends that smaller firms have had to deal with.
‘There is capacity out there,’ Elliott Vigar, the Law Society’s head of regulation, told the Gazette, ‘but those providing it are going to be more choosy and more expensive.’
The renewal season had already been slow, Vigar confirmed, with some qualifying insurers yet to even write terms – a situation also highlighted by Colin Taylor, executive director of Willis, of which broker Prime Professions is a division. ‘Although many firms will have already finalised their affairs,’ said Taylor, ‘there are still an enormous number of firms that have yet to receive terms from their existing insurers and/or obtain alternatives.’
Insurer withdrawal and ‘retrenchment’ (limiting the profile of firm the insurer is willing to cover) had already been themes of the 2013 renewal season.
Crilly said: ‘It is basic supply and demand – there are fewer insurers willing to offer cover so firms are facing higher prices. Firms are also finding that their performance is coming under more scrutiny; insurers are more closely investigating their financial reports and claims experience to help them decide which risks they want to write.’
Cover for one- to four-partner firms sought between now and the deadline, he estimates, will be ‘as much as 25%-50% more than last year’s premium’.
That may simply lead hard-pressed firms, in what seems like a triumph of hope over experience, to another unrated insurer. Some 20% of firms use unrated insurers. Crilly added: ‘The rationale behind choosing an unrated insurer hasn’t changed – it’s a price-led decision and when firms can afford rated insurance, they will choose that option. This year the controversy around Balva and the evolving situation with Berliner has emphasised the risk of using unrated insurance, but that hasn’t changed firms’ price-led decision process.’
While Vigar is sympathetic to the financial pressure that firms are under, he can now stress with some confidence that unrated insurers come with a real, not just a theoretical, risk. He said: ‘We have now seen three insurers, each with significant market shares, withdraw from the market or fail in recent years – Quinn, Balva and now Berliner. Law firms need to be aware of the risks of opting for an unrated insurer, and they should not just consider price above all else.
‘Balva has caused jitters among some law firms,’ Vigar added. ‘Unrated capacity has always posed a risk of failure, whereas rated insurers have at least been subject to independent assessment and can give law firms a sense of reassurance.’ Nevertheless, Vigar added: ‘We have previously been wary of saying that unrated insurers should not be an option, because using them is better than the alternative – wrapping up business.’
Recognising that the problem of capacity in the market is most acute for one- to four-partner law firms, the Law Society’s response has been to establish, with Miller Insurance Services, its own service for smaller firms – providing access to insurers with at least A- (Standard & Poor’s) or equivalent financial security rating but not a broker service or any advisory services.
Cover achieved through Chancery Pii is not, stressed Vigar , intended to undercut unrated insurers, but instead aims to increase capacity in the market for small firms – and indeed has encouraged new entrants. Chancery Pii aims to guarantee some choice for firms in a part of the market where some firms face almost none, by maintaining a ‘panel’ of insurers – currently composed of Allianz Global Corporate & Specialty AG, Aspen Lloyd’s syndicate 4711 and Pembroke Lloyd’s syndicate 4000. Since its launch in late August, Chancery Pii has received hundreds of requests for quotations, according to the Law Society.
Taylor also confirmed that there is capacity and a degree of choice for smaller firms, if they can meet certain criteria. ‘We are continuing to find solutions for many firms as we have exclusive facilities for firms with one to ten partners with Liberty (one), Axis (one to five) and W R Berkley (six to ten).’
But, as Taylor admitted, insurers have ‘continuing concerns over historical conveyancing exposures, and the late release of terms from some sectors of the market’.
At this late stage in the cycle – according to Vigar and brokers – there is an absolute premium on the correct presentation of information sought.
‘Firms still looking for cover need to ensure that their renewal submission contains all the information required by insurers,’ Taylor counselled. ‘The most common problem area is where ‘Qualifying Insurer Claims Summaries’ are either non-existent, incomplete or out of date. At this stage, it is vital all this information is provided as, with the right information, solutions are often still available.’
The slow start to the renewal season was always going to lead to a last-minute rush to obtain cover. But Berliner’s withdrawal has turned a manageable stampede into ‘significant turmoil’, says Taylor.
Of course, this story cuts against the picture insurers painted as they lobbied for the end of the open-ended obligations represented by responsibility for providing cover for firms in the assigned risks pool. The argument ran that, with this risk for qualifying insurers removed, new insurers would enter the market, providing increased capacity and lower premiums.
Clearly that has not happened. As to whether market capacity would have been even worse without the end of the ARP, one can only speculate. But with PII determining who can, and who cannot, continue to operate a legal practice, cover is favouring larger firms, certain practice areas above others, and diversified firms over those with exposure to a limited number of ‘high-risk’ practice areas.
Beyond cover: the extended indemnity period and cessation
Firms that are unable to obtain qualifying insurance by 30 September will be given a 90-day policy extension from their previous insurer. This extension will be in the form of the extended indemnity period (EIP) and the cessation period (CP).
The EIP is a period of 30 days in which a firm can continue to practise and try to obtain qualifying insurance. If qualifying insurance is obtained, the new insurer must backdate the policy to the start of the EIP. If not, firms will enter a cessation period of 60 days in which firms will be unable to accept new instructions and can only perform work in connection with existing instructions.
If firms are unable to obtain PII outside of the EIP or cessation period, then they will have to cease practice and their insurer will be required to provide them with the mandatory six years’ run-off cover. The run-off cover will be deemed to have commenced from the start of the EIP.