Posted by Brian Boehmer, a partner in the UK Professions team at Legal Futures Associate Lockton
The first part of this blog last week looked at the market conditions that influenced this professional indemnity insurance (PII) renewal season. In this concluding part, I reflect on what happened.
Our data comes from placing 701 firms’ insurance, introducing £39m of gross written premium to 15 leading compulsory primary insurers.
Providing our clients with choice of insurer regardless of the size or profile of a practice, helps us maintain very high client retention rates, with over 97% of our clients continuing to renew with us.
However, we only placed new clients with 10 of those 15 insurers, providing further evidence that some had a reduced appetite for growing their portfolios during this period.
When reviewing the statistics below, it is important to note that each firm’s risk profile may change during the policy period, so when we reflect on what we saw during the season, we are not comparing like-for-like scenarios.
Fees can fluctuate, new partners may have joined, others may have exited and additional practice areas could be added, and existing practices areas increased or decreased during the period. What is a fact is that, unless a practice has elected to run off and therefore park their historic risk exposure, their tail of liability increases.
Our clients that renewed during this period recorded an average fee increase of 7.5%. The partner size segment that experienced the largest growth in percentage terms was 11-25 partners, at 11.3%. This was followed by four-to-five partner practices at 8.9% and the largest practices (those that have in excess of 26 partners), growing on average by 8.6%.
Excluding anomalies such as relatively new practices that could have experienced exponential growth during the last policy period, and those that have significantly altered their risk profile along with the practice areas they undertake, the average rate increase for the primary limit of indemnity was 9.5%, with firms in the North-West the worst affected.
Given rising fee income, this led to the actual insurance cost increase by an average of 23% – reaching nearer 30% in London and the North-West, compared to closer to 15% in the rest of the country.
The working layer
Pricing for the working layer – which is the first excess layer above the compulsory primary coverage – witnessed the most dramatic increase, with the average rate up by 47%.
Some practices would have experienced an even more significant rise than this because of how the minimum premiums increased for this layer of insurance. The worst affected were larger commercial practices in London, but also commercial and conveyancing practices across England and Wales.
Capacity is incredibly limited for the first excess layer, with very few willing participants due to the modest costs involved. Whilst the rate increases are, of course, difficult to accept, the pricing for additional millions of insurance for the legal profession is still considerably cheaper than for other professional services firms, with those in the construction industry seeing the sharpest rises of all.
The layer above the £10m
For those practices purchasing insurance above £10m, we saw premiums increase by 6% on average. This would have been more for smaller practices as the insurers applied a gradient to their pricing that was steeper for the first £25m and tapered off for higher limits of indemnity, and then plateaued.
For some of the largest practices in the country, which buy hundreds of millions of cover, as insurance capacity dries up, the cost of additional cover rises.
Just over 13% of the clients that we represent signed up to an extended period of insurance, with the rest taking a 12-month option.
This was a significant reduction on the April renewal season, when around 25% of practices took extended terms. This was a similar number to October 2018, when 23% of practices took longer terms.
The reason for the decline in practice taking a long period could have been the additional cost applied at renewal, along with the loading of the premium if a practice wanted a longer-term option.
Primarily, however, we believe the drop in longer policy periods was due to a reduced willingness on the part of insurers to offer them, largely due to limits imposed on them in respect of their total premium capacity.
Continuity of insurer
Despite an array of choice, 92% stuck with their existing insurers. Those who switched did so mainly due to a change in an insurer’s risk appetite, resulting in some price differentiation.
Timing of renewals
Due to the prevailing market conditions, the process for renewals was slower than in previous years, with insurers asking more questions whilst also undertaking their own due diligence beyond reviewing the presentation that firms prepared for them.
In light of this, we encouraged practices to provide presentations in good time, recommending these should be in with us no later than six weeks before the renewal date. Nonetheless, we still saw a vast number arrive late in the day, with some proposal form declarations signed with less than a week to go to renewal.
Premium capacity levels were an issue for some insurers, so this delay may have resulted in those firms having fewer options.
Forewarned is forearmed
For those practices that renew outside of the traditional renewal period, it’s important to take stock of what has happened during the October season and not to make the same mistakes as some of your peers. It is widely expected that the insurance market will continue to toughen before it gets any easier, so it is imperative that we act in good time to navigate the challenges ahead.
Speak to your broker now to establish a plan of action so that they can begin preparations earlier than perhaps you may have done so before.
Having your presentations ready six weeks before renewal should be the absolute minimum time. If your risk profile has changed significantly or you have experienced claims, then you should allow even more time.