Posted by Chris Marston, chief executive of Legal Futures Associate LawNet
You know that feeling you get when you return to work after moving house? The warm embrace of ‘business as usual’ after a period of sustained frenetic activity, a little stress, mixed with the excitement that comes with achieving a good outcome for you and your family? Well, I’ve just completed the annual renewal process of professional indemnity insurance (PII) for more than 50 firms in our network, and it’s a similar feeling.
Pretty soon we’ll see the ‘overview’ articles in the legal press, with comments from brokers, insurers and other advisors. We’ll see some hard luck stories and (less likely) some tales from firms who have secured a better deal. Meanwhile I thought I’d share some of the themes arising from our own renewal exercise.
The LawNet PII scheme provides cover up to the LawNet minimum compulsory indemnity limit of £10m with higher limits available upon request. Our PII scheme accounts for the largest placing of covers in the legal sector (circa £1.2bn), and gives our members access to a bulk buying discount that they could not achieve alone.
But it’s not just about size. Each firm’s premium is rated individually on the basis of that firm’s own risk profile and claims experience. Group discounts are then applied to reflect the advantage of purchasing as a group and recognition of our ISO 9001 quality standard.
A harder market
As other commentators have noted, the market was a little harder this year, with insurers focusing particularly on conveyancing – not only residential but commercial too. Those of our members whose mix of business is tilted towards conveyancing have seen that reflected in their terms this year.
Firms with excellent claims records are seeing their behaviours rewarded, and that is entirely appropriate. I can think of one of our member firms which enjoyed a premium reduction of more than 40% this year on the basis of an improving risk profile.
In the absence of any ‘official’ statistics I must rely on anecdotal evidence, but having spoken to a number of brokers the consensus seems to be that premiums across the profession rose by a little more than 10% this year, with a further upward adjustment for any increase in fee income. The ‘PII rate’, i.e. the premium expressed as a percentage of fee income, seems to be between 3.5% and 3.7% across the spectrum of firms.
LawNet members saw an average premium increase this year of just under 10%, but from a very low base, and against a background where fee income had increased across all firms by around 6%. The effect upon the PII rate was negligible therefore, and this year’s measure was 2.3% of fee income.
We all know that it’s cheaper to buy in bulk, but insurers deal in risk, and a collection of poor risks combining together are unlikely to be able to secure a significant commercial advantage. LawNet operates a compulsory quality assurance programme. The preferred standard is ISO 9001:2008/LawNet Quality Standard (LQS). This standard comprises the ISO standard interpreted for the law firm environment by LawNet and taking account of the Solicitors Regulation Authority (SRA) Code of Conduct and other relevant quality standards.
Each LawNet firm must designate a head of quality and must obtain accreditation to ISO standard within two years of joining the network. Implementing the LQS brings many benefits to firms, including uniformity of internal processes, a reduction in errors and complaints and greater client advocacy, all of which leads to a risk profile that will lower PII costs.
Unlike some other quality marks, the LQS is subject to twice-yearly assessments to help firms to maintain standards. The primary insurer in the LawNet PII scheme also provides a range of risk management tools and members availing themselves of these know that a better risk profile will result.
Excess matters, too
The SRA-instigated debate about the right minimum level of cover has been parked for now, and as mentioned above, LawNet members sign up to a £10m minimum, but the right level of excess is an important issue too. A higher excess can reduce premium, but it’s a judgment call based on a firm’s cash position and its claims record.
LawNet members who are comfortable with a higher excess benefit from using our own captive insurer to insure the excess portion, but as the insured parties effectively own the insurer, this is generally more cost effective than in the open market.
The traditional options for excess management have been to: pay the primary insurer an additional premium to buy out the excess; insure the excess with another commercial market insurer (commonly known as an in-fill policy); or underwrite the excess from the firm’s own resources without recourse to insurance.
Each of these can be expensive or leave firms exposed to risk.
Our member-owned captive insurer allows firms to pay only for the insurance cover that they actually need, because, unlike a commercial insurer, the captive does not collect the full premium in advance. Instead, firms pay an initial deposit premium representing up to 22.5% of their aggregate excess. The balance of the premium does not become due until two years after the end of the policy year, and is based on firms’ actual claims experience during the period. The better the claims experience, the bigger the rebate on the balance of premium.
Business as usual
So now that the exercise is over for another year – despite the SRA changes, most firms have stuck to the old renewal date – what should firms be doing? It seems to me that the focus must be on keeping risk management absolutely at the heart of the business. It’s good for the firm’s finances and good for clients. And happy clients will recommend you.