Report: indemnity insurance market softening this year but underwriters wary of non-lawyer owners

Holland: insurers concerned about conflicts of interest in ABSs

There are signs of a softer professional indemnity insurance (PII) market for some law firms this year, but underwriters are looking to handle alternative business structures with care, a new report has claimed.

The annual market insight report from broker Lockton predicted that the reduced cost to insurers of the reformed assigned risks pool, combined with the pool’s impending closure in 2013, “will be reflected in PII premium rates” this year.

“Overall, the majority of existing insurers are anticipating a relatively flat renewal, but firms with a particularly good risk profile and claims history should expect a softening of PII rates,” it said.

The report said the other positive effect of the closure of the ARP in 2013, and the sharing of the liabilities between insurers and the legal profession in 2012, is to bring in more qualifying insurers – with Axis, Elite and AmTrust entering, while “several insurers that had exited the solicitors’ PII market could be enticed to return, although reservations exist about the breadth of cover provided by the SRA’s minimum terms and conditions”.

Lockton said the new entrants are focusing on gaining market share in the one-to-10 partner sector, “but the financial strength of some market entrants should be scrutinised by firms wanting a long-term relationship with their PII insurers”.

Outcomes-focused regulation is also proving a positive move for the PII market. “It will raise the bar for risk management and will make firms think more carefully as to how they manage their business, and how they demonstrate that they have appropriate systems and processes in place,” the report said. “There is unlikely to be an immediate cost saving in professional indemnity premiums, but over time it is believed improved risk management procedures will result in reduced PI insurance premiums.”

However, ABSs – at least the ones that are more than just conversion of legal disciplinary practices with non-lawyer partners – are proving a new challenge to insurers, said Steve Holland, Lockton’s senior vice-president, professions. “Insurers will want to satisfy themselves about the control of the business and the management of any potential conflicts,” he said – one insurer has suggested that it will invoke the run-off clause should it become unhappy with the new control over the business.

He continued: “In particular ABSs with a new business model and new services, which are multi-disciplinary practices (MDPs) will potentially bring together a variety of professional services, such as accountancy, surveying and independent financial advisers.

“Some insurers will have experience in underwriting these risks across different professions, and will be able to rate accordingly, but those that don’t could find rating more problematic or will have no appetite to insure some risks due to poor loss ratios on their portfolio of business. So it is important that MDPs seek insurers with quality capacity and appropriate experience.

The report also reflected on the 2011 renewal experience, when the £249m solicitors paid for the compulsory layer of cover was the highest since the profession turned to the open market in 2000. However, Lockton said that 54% of firms saw their premiums go down, meaning those with a poor risk profile and claims experience hit hard.

“The ongoing fallout linked to the continuing problems in the economy has led to an increase in claims against solicitors, and in particular ones involved in commercial and property work. During 2011, 85% of claims in the ARP arose from conveyancing work and 50% of these claims came from lenders. Mortgage fraud has also been a particular problem and has resulted in a number of high value claims. These claims are likely to increase PII premiums for firms working in this sector.”



    Readers Comments

  • Paul Evans says:

    I second LegalFutures findings of a softening market, we have seen substantial reductions in costs in certain risks.

    However, we believe there is sufficient expertise in the market to take on the mixed discipline ABS firms. Many of the Qualifying Insurers have books of business in other leading professions. Perhaps a more worrying aspect is that the imposition of Minimum Terms on insurance for non-legal disciplines could substantial increase premium costs.

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