Unrated PII insurers still tempting hard-pressed firms

Cover: survey says finding PII becoming harder

Unrated insurers continued to claim more than a fifth of the professional indemnity insurance (PII) market at the last renewal round, while the Solicitors Regulation Authority (SRA) mulls whether to force them to ‘get rated or get out’ of the business.

Meanwhile, only three out of four law firm applications for PII were approved last year, continuing a downward slide from nine out of ten two years ago, according to a survey.

The figures, overshadowed by the withdrawal of XL Insurance from insuring firms of up to three partners in August and the earlier collapse of Latvian insurer Balva, were compiled in the Law Society’s annual survey of the 2013-14 PII market, published last week. The survey consisted of interviews with 595 firms of fewer than 25 partners.

Market instability was evident in several indicators, although the vast majority of firms were able to renew their PII in the October renewal round. Some 185 firms applied to the Solicitors Regulation Authority (SRA) to join the extended indemnity period after not obtaining insurance for a variety of reasons, and some subsequently closed down.

According to the survey, overall, more than three-quarters (77%) of applications for PII cover in 2013-14 led to an offer being made. But this was the second year in a row to register a slide, reflecting an ever tougher market and indicating pressures on financially less secure firms to pursue cover wherever they can. Last year 83% of applications led to an offer and in 2011-12 the figure was 90% of applications.

Just over half of firms stayed with their existing insurer, down from 65%. The larger the firm, the more likely they were to stick with an insurer. The survey said these figures reflected the withdrawal of Balva and partial withdrawal of XL.

Rated insurers Travelers (17%), QBE (15%), and Zurich (9%) insured more than 40% of the market between them in 2013-14, with the top two increasing their share by 11% combined. But unrated insurers Alpha (13%) and Elite (8%) respectively increased their share by 5% and 6% compared to the previous year. Rated insurers AmTrust (8% of the market) and Axis (6%) also enjoyed substantial growth in market share of 7% and 3% respectively.

XL, previously the largest PII insurer, saw a 20% drop in its share to 2%. Chancery Pii, the joint venture between the Law Society and Miller Insurance Services, which launched at the end of August, obtained only a 1% share.

Unsurprisingly, share of the market by firm size gave a different picture, with, for example, Zurich having an overall share of just 9% but insuring 21% of firms with 11-25 partners. Unrated insurers were used by 23% of sole practitioners and 25% of 2-4 partner firms, while all of the largest firms used rated insurers, as did 98% of 5-10 partner firms.

By turnover, the picture was different again. Allianz had just 3% of the total market but insures 21% of firms with a turnover of £5m or more

Despite a Chancery Lane campaign to discourage firms from seeking PII from unrated insurers, the figures suggested price was the paramount consideration in choice of cover. Some 95% of firms said price was an important factor, and 58% the most important. Just 20% said the financial security of an insurer was the biggest influence, although this had doubled since the 2012 survey. An existing relationship with an insurer was also cited as important.

Among firms that said they would seek a variety of quotes in the 2014-15 indemnity round, just 55% said they would approach rated insurers only. Smaller firms and sole practitioners were less likely to stick to rated insurers.

A choice of rated or unrated insurer may become impossible in any event. An SRA consultation on whether to bar unrated insurers from providing PII ended at the end of last month. If the proposed minimum ‘B’ rating for insurers is adopted, the consultation estimated that up to 26% of firms would face a slight increase in premiums. But this assumed that the two largest unrated insurers, Alpha and Elite, which between them provide 95% of unrated cover, sought and were granted the necessary rating.

Other findings in the survey were that 11% of firms postponed retirement decisions because of the cost of run-off cover – which averaged 200-300% of annual premium, but in some cases was quoted at up to 600%.

More than two-thirds of firms that had had policies with Balva reported finding renewal in October 2013 particularly difficult.

Law Society president Nick Fluck said: “By purchasing PII you are buying a claims service, so you need to ask yourself whether this will be available to you in the event of a claim made against your firm. As many former Balva firms are now acutely aware, the consequences of not checking the financial strength of an insurer before purchasing their PII policy can be significant.”

Alan Radford, chair of Chancery Lane’s PII committee, said: “The biggest uncertainty concerns the outcome of the SRA’s proposal to introduce mandatory ratings for participating insurers, which threatens to exacerbate instability in the solicitors’ PII market. Delays in announcing the outcome will make it difficult for insurers and firms to plan carefully for the next renewal and for the Law Society to advise firms how to use the market effectively.”


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