Six months on from the biggest shake-up in solicitors’ professional indemnity insurance (PII) arrangements for more than a decade, figures show that less than 5% of firms took up the new option of moving their renewal date from the “scrum” of 1 October.
Some commentators had predicted as many as 30% of firms would move to a new date, while others believed that many firms would stick to 1 October out of ‘inertia’. So what prompted firms to make the move – and what factors made them stick – and how did brokers and insurers respond to the flexible option?
It is important to put the introduction of flexible renewal dates into context. The move was just one of the changes brought in last year alongside the abolition of the assigned risks pool (ARP) and the introduction of the extended policy period, which saw 136 firms closing following the 2013/14 renewal round – some (but not all) because they could not obtain cover.
On the plus side, the closure of the ARP was a key factor in encouraging interest in the market from insurers, with 26 competing for business compared with 22 in the previous year.
However, it was a turbulent renewal round for many following XL Insurance’s decision to withdraw cover for one- to three-partner firms, and the Balva/Berliner debacle, which left hundreds of firms scrabbling for cover at the eleventh hour.
This year’s round could also be challenging, depending on the outcome of the Solicitors Regulation Authority’s consultation – which closes today (March 24) – on whether participating insurers should be required to have a rating after a study found potential inconsistencies in protections for clients depending on the status of the insurer.
When it came to moving to a new renewal date, just 433 of about 10,700 law firms took up the option. According to the SRA, 26 firms went for a policy of less than 12 months to set a new date for future renewals. Eight decided to align with the end of the calendar year and 135 with the end of the financial year. The most popular date was the end of February, largely driven by Travelers’ offer of a 17-month policy, with 274 choosing that option.
Those moving dates were largely small and medium-sized firms – though there were some larger provincial firms, reports Andrew Darby, financial protection consultant for the SRA.
It was difficult to judge what the take-up would be, he says, pointing out that when the Republic of Ireland took similar action, only one firm moved from their 1 December renewal date.
It is also too soon to know whether moving renewal dates will make it easier or harder for firms to renew. ‘There are arguments both ways,’ he says. ‘Having a single renewal date can mean all insurers are in the market and hungry for business. The counterargument is that, because everyone is trying to arrange their policies, brokers and insurers can be stretched and it can be chaotic for firms.’
Alan Radford, chair of the Law Society’s PII committee, says the committee did not expect a rush to change dates on any side because there is still volatility in the market.
‘Some firms will be watching to see how it works for others first, so I would expect it slowly to gather momentum,’ Radford says, though he adds: ‘I am personally a little surprised more firms didn’t take it up, though nervousness over the Balva experience maybe made some firms stick to a year rather than risk going for a longer period.’
As well as the benefit of increased flexibility, he says the move should enhance the relationship between solicitors and their broker and insurer. ‘The single renewal date happens in a bit of a panic and we felt firms were being dealt with as a commodity and there wasn’t always the individual care we felt there should be.’
His firm, Browne Jacobson, is a full service outfit working with commercial, public sector and insurance organisations. It did take up the option, taking out an 18-month policy to the end of March 2015 to reset the renewal date closer to the financial year-end and thereby avoid the 1 October “scrum”. ‘There are no adverse implications for the firm as we see it,’ he says.
Robert Males, managing partner of Hertfordshire firm Underwoods, says it did not change its renewal date because it had a ‘very attractive two-year deal’ from the existing insurers.
But he says: ‘I think having a flexible renewal date is a sensible option and I suspect that more firms are likely take up that option in years to come. The disadvantage of having one date a year is that there is a rush at the last minute, although for well-run firms, with good insurance profiles and claims record, quotes come in early – and if they are competitive they are accepted well before the deadline.’
So what are the pros and cons of moving from the single renewal date? Frank Maher, a partner with risk management and professional indemnity practice Legal Risk, highlights some positives: ‘Taking a policy for more than 12 months – generally up to a maximum of 18 months – at current rates gives the one-off benefit of fixing the premium for longer, even though your fee income might rise. It avoids the fray in the run-up to October and, when you come to renew, underwriters can spend more time on your renewal.’
The downsides, he says, are: ‘You may pay for 18 months and cease practising before then; you have to finance 18 months’ premium rather than 12 months; your fee income or rates might go down, though I can’t see that saving that much in reality; and you might have top-up cover which still renews on 1 October.’
When it comes to sticking with the common renewal date, he notes: ‘There may be some premium saving being with the majority from market forces, while “problem” firms may get cover by slipping through “under the wire”.’
Brokers and insurers have differing views about the benefits.
Travelers, now second in terms of market share, took the lead in offering 17-month policies to existing, trusted clients.
This option was not offered to new clients. Assistant general manager David Sawyer explains: ‘We offered it to clients who had been with us for some time. We wanted to maintain that relationship by offering them a longer-term policy and committing to a pricing structure that avoids them having uncertainty over what will happen in October. There are concerns in the market about unrated insurers, variable pricing and insurers coming in and out of the market. We are double A-rated and this offered consistency and stability of pricing.’
Fewer firms than expected moved their renewal dates. So what were the reasons to stick or twist?
Three-partner practice Legal Risk is an LLP providing advice on professional regulation and professional indemnity to lawyers and professional practices. Partner Frank Maher (pictured) says it opted for an 18-month policy.
‘I couldn’t see any benefit in not taking the option,’ he says. ‘There is always a risk that what is on offer for firms of your particular profile might change, so if you can sleep easy for 18 months rather than 12 you might as well do so. You are also locking your premium into current rates for a bit longer – they might go up but I don’t think they will go down significantly, so I don’t think you will end up paying more.’
In the longer term, he says it means the renewal date will be tied to the firm’s financial year-end ‘which makes sense for us. I thought more people would opt for a different date and buy certainty. But I think there will be a ripple effect, with firms starting up on different dates and looking to renew at dates to suit them rather than the insurers’.
The 58 English and Welsh member firms of LawNet stuck with 1 October. Chief executive John Thomas says: ‘We couldn’t find a better date. Later in the year is too close to Christmas, while early New Year is too soon after the holidays. Lots of firms want to avoid March/April as it is their year-end; you don’t want to do it in the summer because of holidays.’
Firms need a good reason to change, he says, such as aligning with year-end or a period of positive cashflow.
‘Insurers could have tempted people by offering advantageous terms for buying a longer policy but I don’t think many of them did,’ he notes. ‘We talked through other options but we stuck with 1 October because it works for us and it is important to go to the market together, so we retain the “bulk purchasing” advantage of our placing.’
The policies were offered on a straight pro rata basis. ‘It isn’t a 17-month policy for the price of 16 months,’ he says. ‘However, we have guaranteed the price for that period, so the premium won’t change if the firm grows – though if it merged with another firm, we would have to look at underwriting that risk because of succession planning issues.
‘We will review any changes at the end of the 17 months. This makes it different to a two-year deal, which will have break clauses and criteria that need to be met after the first 12 months. But the risk works both ways – if the firm’s fee income reduces, we won’t be returning any premium.’
To take up the option, the firm needed to have a credit facility in place or pay upfront, he says. Not all firms took it up, but those that did ranged from sole practitioners to top-200 firms.
‘We are happy with our take-up in terms of our portfolio,’ he says. ‘We decided 17 months was best for us in handling the logistics of two renewal dates. We have a handful of firms renewing on other dates but we felt having two main dates was easier to manage internally. We expect there to be competition from other underwriters when those firms come to renew, but we like competition.’
Richard Brown, executive director of broker Prime Professions, now part of the global risk adviser and insurance broker Willis Group, specialises in small and sole practices.
‘Our experience is the great mass weren’t convinced enough of potential benefits to move,’ he says. ‘The majority of those that did had long-standing relationships with their insurer who offered the option as part of their early renewal offering because of the trust built up between them. Underwriters need to be comfortable with a firm’s claims history to enter into longer-term policies.
‘In general terms, the jury is still out as to whether you are better off negotiating in the pack, where bulk buying activity may be to your benefit, or whether you are better off standing alone when the market has more time to consider your renewal. You pays your money and you takes your choice.’
Big and small
The market is different depending on the size of firm. Sandra Neilson-Moore, Marsh’s head of solicitors’ PI for the EMEA region, says: ‘In our experience, there is no particular reason for the large firms to change and no perceived benefit to them in doing so. In the absence of a specific driver to change, I don’t see much movement among the large firms.’
Talking about small to medium-sized firms, John Kunzler, Marsh’s UK head of regulated professions, says: ‘We don’t have a particular reason to recommend moving renewal dates to clients. Generally, you get more underwriters operating in the peak season so, if you want availability of the maximum number of quotes, it probably makes sense to stay in that period.
‘We only had one case where the firm wanted to explore whether it was worth taking an 18-month policy and it did go with that.’
He says that, for 12 of the 14 renewal cycles since solicitors came on to the open market, the single renewal date has worked more for them than against them.
‘From an underwriter’s perspective,’ he adds, ‘it is useful to be able to look at a book where the policy periods are all the same, so you can see how much premium you have got in and what losses fell within that underwriting year to set pricing for the next renewal. If renewal dates move around, it will be harder to assess the picture.’
Brian Boehmer, a partner at Lockton, says the firm represents 15% of the legal profession, but less than 1% of its portfolio moved renewal dates. He also has experience of structuring and administering group insurance solutions, most recently for the QualitySolicitors group, and says most stayed with 1 October.
‘I don’t see any benefit for the vast majority of firms,’ he says. ‘Most insurers aren’t geared up for different renewal dates. The risk is you will be competing against other professions which are underwritten with a lot smaller terms and conditions; and the underwriter will naturally do the less risky business for the same reward.’
Firms that move away from the pack also have to be confident that their risk profile is not going to alter, he says. ‘You could have a claim and if there aren’t underwriters offering terms around that time, you could end up paying a lot more.’
At Zurich Insurance, legal professions manager Jenny Screech says the company offered policies up to a maximum of 18 months. ‘Given the longer policy period, we needed to be even more satisfied than usual regarding the stability of the firm from both a risk and financial perspective,’ she says.
‘The response from firms varied. Many are comfortable with the current renewal date. Others saw it as an opportunity to remove themselves from the “scrum”, so in future they will be able to engage with brokers and underwriters in a more considered way. Many also saw the change as an opportunity to achieve certainty of premium for a longer policy period and in our view this was the most significant driver.’
At broker Aon Affinity, sales and services director Ryan Senior says a number of clients wanted to move renewal dates. ‘We worked with our insurer partners to offer some the opportunity to move,’ he says. ‘We haven’t seen any specific trends in terms of size or type of firm, but risk appetite did play a part [among] both insurers and clients.’
He says that if a client wanted to extend their current 12-month policy now to establish a new renewal date and avoid the October rush, ‘we’d certainly look at it and work with the insurer to try to meet the client’s needs’.
At 360 Legal Group, most members stayed with 1 October. ‘My suspicion,’ says chief executive Viv Williams, ‘which was voiced by several people, is that firms generally feel there is safety in numbers. They feel happier to be in the pack for renewal rather than stand alone when they may face more scrutiny.
‘It’s all about risk and nervousness about standing out. However, I am convinced this will change as firms become more corporate in management style. I suspect we will see more alignment of dates to suit year-end rather than a date to suit the insurer.’
Grania Langdon-Down is a freelance journalist