Posted by Marc Rowson, a partner at Legal Futures Associate Lockton
The marketplace for professional indemnity insurance (PII) continues to experience two milestone dates in the calendar year, 1 April and 1 October. We estimate over 90% of law firms renew in this period.
Last year saw a welcome shift in pricing, with the cost of insurance a lower percentage of a firm’s revenue. The catalysts for this improvement were new insurers entering the market and, perhaps more importantly, established insurers increasing their appetite.
The one caveat is that not all firms saw rate reductions (cost of insurance as a percentage of revenue), and there was a clear correlation between reduced exposure to property work and a reduction in rate.
This improvement in the costing environment did not translate to lots of firms swapping insurers, with the majority of insurers all reporting retention rates of well over 90%.
There is reason for continued optimism in 2024, primarily as a result of further new entrants and the majority of the established insurers retaining their increased appetite – and with topline premium targets to meet. The signs are positive, and as such we expect a greater amount of choice for a greater number of SRA-regulated firms throughout 2024.
But it is important to state that some in the insurance community are nonetheless concerned about what the 2024 risk landscape will present.
Some insurers continue to be cautious of the impact of increased interest rates last year, with a large number of mortgagees soon due to be hit by greater repayments as they come out of fixed rates. This could in turn lead a rise in property repossessions, collapses of property developments, and more companies entering administration, all plausible triggers for negligence claims against law firms.
The more optimistic outlook is that higher interest rates will stimulate more new capacity. Many negligence claims take three to four years to settle, sometimes longer, and so the premiums insurers generate from their portfolios can be invested for some time before they have to pay out claims.
Higher interest rates mean a greater return, of course, and such is the size of the solicitors’ PII market – estimated annual primary premium of c.£350m – and the ability to amass premiums quickly from two main renewal windows, that entering the market becomes more appealing.
The cost-of-living crisis also continues to concern insurers given an ever more litigious environment and an abundance of litigators. We have historically seen that a less buoyant economic environment often results in an increase in claims and circumstances, with even spurious claims generating administrative and defence costs.
Claims inflation, caused by broader economic inflation, is a further factor. As the value of a claim increases, factors such as asset values and costs will grow, meaning a possible adjustment in premium.
Other areas that insurers are likely to shift their focus to include:
- Financial health of a practice – high-profile thefts from client account last year was triggered concern of an increase in this type of loss.
- Greater scrutiny of financial mis-selling work and the relationship between firm and funding arrangements
- AML and identification checks in the wake of an increase in vendor fraud;
- The register of overseas entities; and
- The re-emergence of buyer funded developments.
To conclude, there are plenty of reasons for firms to be confident of an improving PII renewal outcome, with the period of increasing rates and scarcity of option thankfully now in the rear-view mirror.
Insurers’ concerns are important and firms need to manage them accordingly, but assuming that the claims environment does not deteriorate, the outlook will continue to be positive for the profession.