Posted by Jon Cook of Legal Futures Associate Quality PI
PII: There will be a downward correction at some stage
Insurance market cycles usually work in peaks and troughs, and are sensitive to interest rates – when rates are high, many write for volume so they can earn decent returns from the money they have banked.
A newly established insurer is stating that it will write lawyers’ business in the near future, and that will bring with it more capacity and some rate competitiveness which just might stimulate better premiums – for the right risks.
Whatever the case, the current pricing structure for solicitors’ professional indemnity insurance (PII) cannot and will not continue indefinitely and there will be a downward correction at some stage.
At least two insurers with significant market share have reduced their 15% commission provided to brokers on solicitors’ business to just 5%, so the broking market is, to a degree, sharing in law firms’ pain. Some are charging fees in addition, which is accepted practice provided that it is transparent.
Very few insurers have made a profit from writing solicitors’ PII over recent times – most do it as a basket of wider products offered to the professions sector in general where solicitors is in the mix due to high premiums per insured firm.
Looking ahead, some firms will not be doing quite so well this time next year with economic headwinds set to strengthen. But there may be little short-term scope or ability to reduce PII premiums because insurers actually wants fewer risks with more premium per risk – so they are likely to stand their ground on rates for as long as they can.
This means that the rate applying to your turnover (to calculate the premium) could still go up next year even though your income may have gone down.
The minimum terms and conditions for PII as set by the Solicitors Regulation Authority are among the widest in the UK insurance market, and provide significant protection to law firms, partly as a result of the need for a public safety net.
Few realise, however, that there are a number of housekeeping rules that need to be followed in order to ensure that cover is maintained. If you are uncertain, ask your broker to explain.
For those firms that cannot get an offer of cover in the run-up to 1 October, we would say ‘keep the faith’, because the last thing an insurer wants is to be stuck with a law firm going into run off, with complete lack of knowledge around what could flush out in the ensuing six years. Frankly, they would do anything rather than go there.
So continue to haggle and you may well get somewhere. Most insurers will do what they can to prevent a law firm from going to the wall, but there is an economic limit to their largesse.
There are many good legal tech businesses whose systems enable their clients to demonstrate security and compliance in their client activity, and law firms can capture such data to demonstrate to insurers how their risk profile is improving.
One is Infotrack (other providers exist…), who we know are able to provide real-time client audit trails and collate activity around lines of business.
We have seen increasing numbers of insurers seeking to recover excesses from partners and directors for claims from firms which have closed. As long as that continues, there will need to be a focus on the Solicitors Indemnity Fund, which provides support for claims beyond the six-year run-off period.
At least one insurer has a facility to step in if and when the indemnity fund is eventually closed.
At this time of year, there are strategic opportunities to absorb law firms that are struggling to obtain cover for reasons that don’t relate to the quality of their work, and those that consider their renewal terms are the straw that breaks the camel’s back, and decide to shut down.
These opportunities require an ability to act quickly and undertake decent due diligence within a limited window, but they do exist.
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