The shake-up of solicitors’ professional indemnity insurance has been protracted. But steps designed to improve insurers’ confidence in the market and increase the flexibility of terms are finally imminent.

First, October sees the demise of the heavily-criticised assigned risks pool (ARP), akin to an ‘insurer of last resort’. Many qualifying insurers complained the ARP made them financially liable for risks they never wanted to cover in the first place, at law firms deemed untouchable because of poor claims histories, mis-selling, poor governance and long-tail liabilities.

Only six firms are still in the ARP and seeking cover – and they will be eligible for a 90-day policy extension from their previous insurer if they are unable to obtain qualifying insurance by 30 September.

Second, October also sees the end of the single renewal date for PII, meaning law firms will be able to purchase insurance that starts or ends at any point in the year. Firms can therefore seek to negotiate longer and more attractive terms.

Greater competition

One intended outcome of closing the ARP is that more insurers will enter the market because they are no longer committed to funding it. The influx of new entrants, it has been argued, will cut premiums and expand the terms of coverage. The hope also is that the change of renewal date will prompt insurers to offer longer-term policies, while law firms might capitalise on their new-found bargaining power.

Yet the reality, judging from the early stages of the renewal season, is that the market is operating in much the same way as before.

‘It is relatively early in the season to give a definitive view, but there are interesting developments,’ observes Paul Gardner, sales and marketing director at broker Prescott Jones Professions.

Gardner says some insurers are testing the water with ‘early bird’ offers, such as a 5% premium reduction if the firm commits to renewing within a very short timetable, although such offers are only available to firms which present with less complex risks. These early bird deals have been seen in the market before, Gardner adds, but he recalls that in 2012 insurers were usually just offering a flat renewal premium.

Jenny Carter-Vaughan, managing director at broker Affinity Select Insurance Services, says some early bird rates suggest premiums are likely to remain relatively flat for the coming year. Only a handful of insurers are offering longer-term policies than the usual 12 months. Travelers, she notes, is offering 17 months of cover.

‘The PII market is not likely to change,’ Carter-Vaughan believes. ‘Both insurers and buyers seem to be happy to keep the October renewal date for the time being, and there seems little appetite for insurers to provide longer terms.’

In any case, Carter-Vaughan offers a warning to clients considering a 17-month policy when so few insurers are offering anything other than the standard 12-month policy with an October start date. ‘Taking on such a policy could result in a law firm being stuck with that insurer until the market becomes more flexible,’ she says.

Of course, the PII market divides by size of law firm – and unsurprisingly larger firms are in a better position. Sandra Neilson-Moore, practice leader for Europe at broker Marsh, believes the market ‘is fantastic for the UK’s top 100’. Here, there is the real possibility of new entrants coming in to the market, bringing more capacity and greater competition over pricing, while existing players are looking to expand their books. ‘If you are a large firm with a good claims history and no outstanding large claims against you, then it is a buyer’s market,’ she says. ‘Rates are probably set to remain steady, or even fall, for firms within that bracket.’

Size matters

The picture is less rosy for the rest. Some experts believe October’s changes could result in less capacity for smaller firms. One of the key reasons why insurers are exiting, retrenching or are reluctant to come into the market is that they believe the SRA’s minimum terms and conditions to become a participating insurer are too restrictive. In force from 2011, the terms set the minimum coverage firms must have in respect of their regulated business.

Frank Maher, partner at specialist risk management and compliance law firm Legal Risk, explains: ‘It is commonly acknowledged that the minimum terms for the purchase of compulsory insurance for the legal sector in England and Wales are the widest of any law society, particularly in terms of Commonwealth countries.’ As a result, Maher adds, ‘it is not surprising that insurers do not want to enter the market or get more actively involved’.

Dylan Hughes, director at broker Brunel Professional Risks, says: ‘The main problem is that insurers are liable for covering law firms’ liabilities for six years in run-off, which is hardly a way to entice them to provide PI insurance. You are not going to see some big household-name insurers coming into the market.’

Andrew Boldt, managing director of specialist brokers Insurance Tailors, notes that while insurers have been lobbying the SRA to close the ARP for many years, under the new regime insurers will be obliged to offer cover for up to a maximum of a further 90 days. ‘Three months of obligatory cover on a firm which is likely to be in distress, with possible financial issues, is of concern,’ he says.

Law firms in this situation, Boldt argues, are often the firms where mistakes are most likely to be made, and hence claims are most likely to arise. Moreover, they may not be in a position to pay their additional premiums. ‘Consequently,’ he says, ‘the new rules still impact on underwriters’ exposures, and are a concern for existing participants and potential new entrants.’

That leads Elliott Vigar, head of regulation at the Law Society, to conclude that any reduction in capacity could be a problem for small law firms. Aviva, he notes, no longer writes insurance for small and medium-sized firms.

‘So without a change in the market dynamic, there may be a reduction in capacity at the lower end of the market as insurers lose their appetite to take on the business,’ he says.

Trevor Moss, a director at broker Brunel Professional Risks, describes one alarming scenario: ‘Some firms are having to make the bleak decision to lay off some of their fee-earners just to pull together enough cash to pay the insurance premium.’ With a reduction in headcount, the firm’s fee-earning potential goes down, ‘and it is more likely to find itself subject to a negligence claim because it has either rushed through a job, or no longer has enough expertise in-house to do the work effectively’, he adds.

‘It’s a real shame,’ Carter-Vaughan reflects, ‘because these are often the same law firms that show a lot of entrepreneurship. But insurers are increasingly looking for certainty.’

Shortlist

At present, the legal PII market is dominated by a handful of firms, particularly at the top end. According to figures released by the SRA in November 2012, of the estimated premium income written by each of the qualifying insurers, XL Insurance is the market leader with around 16.5% of the market, followed by Travelers Insurance and QBE Insurance with roughly 11% each.

Other major insurers are not far behind. Zurich, Hannover, AIG Europe, and Allianz Global Corporate & Specialty are all major players, as was unrated Latvian insurer Balva – with nearly 7% of the market share.

In June Balva, which provided cover for around 1,300 law firms, had its operating licences suspended. The insurer had been prevented from taking on new business in the UK at the end of March.

The Latvian unrated insurer is the latest in a line of high-profile exits. In 2010 Quinn Insurance exited the PII market, forcing thousands of UK firms to look for new insurers. Ukrainian outfit Lemma Europe Insurance Company (which only entered the market in 2009) was forced into administration in October 2012, and household insurer Aviva quit its £30m-£35m premium share, citing ‘a sustained lack of profitability over several years’.

‘Balva has caused jitters among some law firms,’ Vigar confirms. ‘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. 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.’

‘But,’ he adds, ‘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.’

Gardner believes many of those insured with Balva will accept an offer to transfer to Berliner, another unrated PII insurer, due to price. He says Berliner is offering competitive rates to Balva-insured practices, as well as long-term policies that take advantage of the easing of the common renewal date rule.

‘We might think this is a risk, but we have been advised by more than one practice that they have gone for the option because it is cheap,’ Gardner says. ‘However, we believe a large percentage of Balva-insured practices will seek independent advice and move into the rated insurer sector. Inevitably for some, this will mean a premium increase, but the comfort of being with an established rated insurer will be a large draw given recent events.’

Other brokers note that, while they would favour quotes from rated insurers, unrated insurers also need to be approached. ‘We would always want to get a rated insurer for our clients as a first option, and we would always make clients aware of the risks of not using a rated insurer,’ Carter-Vaughan says. ‘However, the difference in price can be very high, and it is our job as a broker to make our clients aware of the rates on offer.’

Standard form

The Law Society has made efforts to improve the chances of members getting cover more easily. Last year it produced a composite PII proposal form to assist members – especially small firms and sole practitioners – with renewals.

The form is a first step towards a common proposal form that should put an end to solicitors having to repeatedly provide the same information to different insurers. The form has been accepted by a range of insurers and brokers, including Apro Management, Hannover, Aon, Bar Professions, Brunel, Howden, Marsh, Prime Professions and Wesleyan, though some require supplementary information.

However, the Society notes that last year only 4% of firms used the composite proposal form, while 52% of sole practitioners and 53% of two-four partner firms were unaware of its existence – a situation Chancery Lane has called ‘concerning’.

Others believe those law firms that are likely to struggle to find insurance cover have only themselves to blame. Maher says that ‘too many small firms have been caught out for poor practice, as evidenced by the conveyancing scandal and an increase in claims for wills and probate. If law firms have a disregard for good practice, proper risk management and sound corporate governance, why should insurers expose themselves to potential claims over the next six years?’

Indeed, proof of effective risk management is going to be ever more of a key determinant for firms if capacity continues to shrink, particularly with regard to those insurers which are prepared to take on firms with fewer than five partners, says Ged Wood, professional indemnity manager at Wesleyan Assurance Society.

‘We want law firms that take risk management seriously to be our clients,’ Wood notes. ‘So we are looking for firms that have ISO9001 and/or Lexcel accreditation, or firms who are looking to become accredited with these standards. That is not to say that law firms without them will be refused cover, but they must be able to demonstrate sound financial and risk management, as well as good corporate governance.’

Better risk and financial management, and internal controls have been cited as areas in which the Law Society and the SRA can help law firms improve. For example, principle 8 of outcomes-focused regulation states that law firms must ‘run the business effectively with proper governance, and sound financial and risk management principles’.

The introduction of compliance officers for legal practice (COLPs) and for finance and administration (COFAs) are integral to outcomes-focused regulation, placing the onus on firms to manage risks in their delivery of legal services.

But the process to embed effective governance and risk management may take longer than envisaged. In January, the SRA revealed that more than 1,200 COLP and COFA nominees failed an automatic verification exercise to check their suitability. In board papers, the SRA stated that 450 failed the test for ‘multiple issues’, ranging from undisclosed criminal convictions to serious disciplinary sanctions. Following detailed investigations and renominations, around 60 nominees had issues so serious that their applications were refused.

Maher says concern over availability of PII coverage should prompt more firms to re-examine their approach to risk management. ‘Law firms cannot take a "tick-box" approach to their own governance and ignore the importance of risks to their business,’ he concludes. ‘If lawyers continue to underestimate these issues, they will find it difficult to find affordable PII cover with a rated insurer.’

  • For a comprehensive, regularly updated list of both rated and unrated insurers, and further information on the type of firm/work they insure, see the Law Society’s Guide to Insurers 2013-14 on the Law Society website.

Relationship advice

Swansea-based Douglas-Jones Mercer Solicitors has six partners. Practice director Barry Davies says his firm has been fortunate always to secure cover easily and at good market rates. He says this is because he spends a lot of time looking at what information brokers and insurers need.

Davies says it is very important for law firms to have ‘an ongoing, open and honest’ relationship with their insurers and brokers: ‘You need to keep a running dialogue about the plans you have for the business, as this may have an impact on your premiums.’ For example, Davies notes, ‘insurers should be informed if you are thinking of merging with another firm, because your risk profile is likely to change, particularly if the firm you are merging with has a bad claims history or does a lot of conveyancing work.’ Similarly, he adds, ‘if you increase or decrease the number of partners or start working in different areas of law, you should let the insurer know.’

Davies also advises peers in other law firms to check the level of cover they are getting to see whether it exceeds the minimum terms, and warns against being tempted to fill in multiple applications for different insurers. ‘Law firms should check the market carefully and see which providers are likely to offer the best coverage at the most suitable rates for their size of firm,’ he says. ‘I’ve been told by brokers and insurers directly that nothing riles them as much as when they receive multiple applications from the same law firms, especially when they are handwritten illegibly and missing basic details. It really counts against them.

Richard Palmer, head of professions and insurance at mid-sized commercial law firm Watson Burton , says ‘at our level, there is plenty of choice of insurer’. Palmer has been responsible for arranging Watson Burton’s PI insurance cover for the past 10 years. ‘It makes sense for me to take charge because dealing with professional indemnity is something I do as a day job, so I have a deeper understanding about the issues, and what insurers and brokers will be looking for.’ He adds: ‘My experience has helped us get better coverage than the minimum terms, but mainly I manage to get our premium at a more competitive price.’

Palmer also stresses the importance of a close relationship with brokers and insurers. He has kept the same broker for a decade and has long-term relationships with two insurers. ‘Both parties want to be kept up to date with any significant changes to the firm – any claims being made or likely to be made, changes in the type of legal work being done, changes in the number of partners and staff and so on – as this can affect the risk profile of the business,’ he says. A lot of law firms do not "get" this, and they risk damaging the relationship with their insurers unnecessarily.’

Neil Hodge is a freelance journalist