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Beware the bittersweet taste of low price

Martin MacHale of Paragon

Martin MacHale of Paragon Brokers explains the poor track record of non-specialist insurers offering cheap PI premiums to the legal sector

“The bitterness of poor quality remains long after the sweetness of low price is forgotten,” wrote Benjamin Franklin.

Franklin was a founding father of the United States of America, author, publisher, scientist, inventor and diplomat. However, as far as history indicates, Franklin was not an insurance practitioner and whether he intended this quote to apply to the London insurance market remains a mystery…

That said, its relevance to the current Professional Indemnity market, and in particular the quality of insurer capacity within it, has never been more significant.

In 2014 The Law Society published a guide to insurer insolvency which opened with the headline ‘First there was Quinn. Then there was Lemma. Now Balva and ERIC. Is your insurer next?’, looking at the collapse of the aforementioned unrated insurers. The guide went on to explain the significance of law firms checking, but most importantly, understanding the financial security of their insurers, because unrated insurers are an unknown quantity. Professional Indemnity insurance (PII) should not be viewed simply as a regulatory cost; firms must consider the cover beyond the piece of paper stating their Limit of Liability. Will your insurer be able to provide the service, support or payment in the event that a claim is made against the firm?

Unfortunately, this trend has continued. Last year CBL Insurance Europe was placed into administration; regulators assessing that it had insufficient funds to meet its claims. QIC, Enterprise, Alpha and Elite are just a few examples of other unrated insurers that have entered the PII market over the last four years with a lack of understanding of the market conditions, resulting in the withdrawal of capacity or the liquidation of the provider.

This uncertainty continues as a number of established insurers in the PII market are in the process of withdrawing their underwriting capability entirely or are redistributing significant amounts of it to other classes of business they deem more profitable and more predictable. The final weeks approaching 1 October 2018 (the date on which 80% of the 8,500 law firms in England and Wales still renew their PII) saw Libra Managers - who provided cover to 20 of the top-200 law firms - confirm it would not underwrite any new business. This left 10 of the 20 firms, for which 1 October was the renewal date, with just six weeks to find a new insurer.

The Solicitors Regulation Authority (SRA) Indemnity Insurance Rule 6.1 states the requirement of a firm to ensure it has qualifying insurance provided by a Participating Insurer. If that insurer is the subject of an insolvency event then the firm is required to find replacement cover, ‘as soon as reasonably practicable and in any event within four weeks’. The importance of having committed insurers that understand the risks and exposures of the PII market has never been more important.

In recent years too many insurers have jumped on the ‘PII bandwagon’ in an attempt to benefit from high premium rates. However, they have done so without a proper understanding of what the open and prevailing wording of the SRA’s Minimum Terms and Conditions really mean and their ‘true’ exposure to long-tail claims. An abundance of insurers drove rates down and created artificially low premiums. In turn, a number of these inexperienced insurers left as quickly as they arrived. Ultimately, it is the law firms who are suffering and in some cases claims have not been met.

In the approach to 1 October 2019, the PII market continues to see change as insurers reduce underwriting capacity, increase rates and more ‘unknown entities’ enter the market in an effort to piggyback on recent premium increases. Ensure you understand the financial security of your insurers and exactly where their capacity comes from. Do not allow yourself to be blinded by short-term, cheap premiums.

A short-sighted policy on insurance purchasing will mean such firms continue to suffer, whereas risk conscious firms that understand the importance of this product will continue to see the benefits of using ‘A’ rated insurers. It is these insurers, who understand this complex product and how to effectively write it, that will remain committed, meet their requirements, pay claims, and provide both continuity and long-term relationships to law firms.

The alternative is all too real - the bitterness of poor quality will remain long after the sweetness of low price is forgotten.

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