Indemnity premiums fell last year but Law Society warns firms over unrated insurers

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By Legal Futures

9 April 2013

Hudson: smaller firms need to make much better use of their available market

Two-thirds of law firms saw their professional indemnity insurance (PII) premiums go down last year, with switching insurers the most common way of securing it, Law Society figures have revealed.

The society has also warned that under-pressure small firms are risking their future by taking out PII policies with unrated providers – 16% of firms went with an unrated insurer in 2012/13, compared to 9% a year before.

The annual study commissioned by the Law Society surveyed 600 law firms – ranging in size from sole practitioners to firms with 25 partners – about their experiences and perceptions of the 2012-13 PII renewal.

Overall premium levels went down, from a 2011/12 median of £24,998 to £20,458 last year; those who changed insurers saw an average of £1,500 below that, while it was £2,000 more for those who did not.

The impact of claims in the previous 12 months was stark, with the median premium for those with no claims £13,288, compared to £73,364 for firms which had notified a claim. Within the previous year, 40% of firms surveyed had notified their insurer of circumstances that could give rise to a claim, and 22% had actually had a claim made.

In all, 67% of firms saw premiums go down, 20% said it went up, while it stayed the same for 13%. Sole practitioners were most likely to see their premiums fall, while 11-25 partners were most likely to see them rise.

The median per cent of gross fee income spent on PII cover for 2012-13 was 3.6%, down from 5.4% in 2011 and 5.1% in 2010, with evidence suggesting that PII premiums present a greater burden for smaller firms, with sole practitioners paying a median 6.4% of gross fee income, more than double the median of the larger firms.

The Law Society reported that, although commercial pressures on firms made them choose the ‘cheapest’ PII quote, the true cost of this cover could be “frightening” if the insurer becomes insolvent. An official rating from an independent ratings agency is the most objective measure of a firm’s financial security, it said.

The Law Society warned smaller firms about insurer solvency after the collapse of two insurers, Quinn and Lemma. At its peak in 2009, Quinn boasted 9.86% of market share and Lemma had 2.9% at its height.

The results also suggested that there was “significant confusion” among smaller firms about the extent to whether individual brokers are “tied to particular insurers or cover some or all of the market”.

The statistics showed that a quarter of firms with less than 11 partners only approached one insurer – and a large proportion of insurers in the legal market received applications from a very small percentage of firms. The Law Society said that suggested a “level of complacency” around sourcing quotations from the full available market.

It said some sole practitioners and small firms are failing to use the market to their advantage and are not seeking advice from their broker about how to do this.

Law Society chief executive Des Hudson said: “Smaller firms need to make much better use of their available market and they need to obtain quotations from all insurers willing to offer cover.

“They should then assess these quotations based on a range of factors, including the insurer’s financial security rating. This is not a purchasing decision that should be made solely on price.”

The analysis showed that in 27% of PII applications, the firm did not know the level of access their broker had to insurers and did not ask for this information.

See the full survey results here.

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