In this lengthy blog, Brian Boehmer of insurance broker Lockton forensically analyses the latest professional indemnity insurance market metrics, then suggests steps that law firms can take to optimise their PII cover. (9 June 2020)
What has become clear from speaking to numerous clients across the country is that the pandemic has paused large amounts of activity for many legal practices. This is particularly the case in conveyancing and commercial work, although there has been significantly increased demand in other practice areas, like matrimonial, wills and probate.
Regardless, professional indemnity insurance (PII) remains an ongoing issue for all, whether you have just gone through the spring renewal or are gearing up for the October season.
These remain the main renewal windows, largely due to the previously compulsory renewal date being 1 October, coupled with the 18-month maximum period of insurance that is generally permitted by the insurers’ reinsurance treaties. This has resulted in practices continuously purchasing either a 12 or 18-month policy.
The aim of this blog is to look at what happened during the spring renewal period and advice looking ahead to the autumn.
In my blog on last autumn’s renewal season, I highlighted that the PII market was a challenging environment and many practices paid more for their cover. This trend of increased premiums continued into this spring.
However, just like in October 2019, some practices had a different experience and saw their premiums remain unchanged, with a minority actually saving money.
Those practices that purchase coverage above the compulsory primary limit of indemnity would have seen the cost of the working layer (the first excess layer above the compulsory primary limit of indemnity up to £10m) rise significantly.
This increase was primarily driven by both a lack of insurer competition and increased claims activity within this layer in recent years.
A basic principle of insurance is that the premiums received from the many pay for the claims of the few. Over the last few years, this principle has been tested within the solicitors’ PII market.
Claims previously made by the few are now being made by a larger number within the profession and they are of even greater value (severity) than before.
This claims activity is having a negative impact and has served as a catalyst for creating the prevailing difficult insurance market conditions experienced by many practices. The vast majority of insurers have been applying actuarially driven rate increases for the areas that have been generating the inflated claims, which have resulted in premiums becoming more expensive.
Increased claims activity naturally influences insurers’ risk appetite and leads many to refine their strategy accordingly. It appears that no practice area is immune from claims, but some clearly have a higher frequency and others have a much greater severity of claim.
While we have seen only a gradual rise in frequency of claim, the severity of claims continues to increase to unprecedented levels.
In light of this increase in claims severity, we experienced further demands and requests from insurers to share in both the risk of claims and the reward of the premium, with many advocating co-insurance.
Co-insurance is where two or more insurers participate on a placement, each sharing a defined percentage of the risk for the same defined percentage of the premium. Although common in the insurance market, it is less so for solicitors’ PII despite the breadth of coverage afforded under the Solicitors Regulation Authority’s (SRA) minimum terms and conditions.
However, this is a changing trend. When you consider that the insurers who underwrite the compulsory primary limit are putting at risk £2m or £3m of their company’s funds on an any one claim basis, a co-insurance approach would appear logical.
It is widely believed that the current environment will get tougher before it gets easier. This view was perhaps reinforced most clearly by the fact that we witnessed a further reduction in the availability of longer-term policies.
Historically, a number of insurers would actually incentivise policy holders to accept policies longer than 12 months, or they would present terms on a straight pro-rata basis.
The demand for longer policies was driven by clients and their brokers against the backdrop of a competitive pricing environment. However, the spring renewal window saw almost all insurers charging policy holders for the privilege of having extended policy periods, with some insurers no longer offering them at all.
Premiums were loaded by up to 31%, with the average additional premium being charged a little less than 10%.
We also saw that insurers that were providing capacity in the working layer charged on average an additional c.67% above the standard pro-rata, for the longer policy period.
For firms that purchased limits above £10m, insurers charged on average 38% more for the additional period above the standard pro-rata. A key reason for this was most likely a lack of competing capacity – claims inflation meant there was no new insurer capacity entering the solicitors’ market this year.
Each year brings changing appetites from certain insurers and, as a result, some practices have to source a new insurer partner, while others actively look for one out of dissatisfaction with the incumbent’s service.
The last 18 months have also seen a greater number of practices without an insurer due to market exits – for example, two managing general agencies, Maven and Omnyy, left the market in 2019 after they both implemented an aggressive growth and pricing strategy at previous renewals. But hundreds of their policyholders were coming to the end of their extended policy periods during the spring renewal period, which meant they were seeking a new insurer.
The tougher insurance market environment has led underwriters posing even more questions to get a greater understanding and comfort about practices before they deployed their company’s capital. In light of heightened controls at many insurers, with peer reviews among underwriters, the list of additional questions could be significant.
The financial viability of a practice, what that practice does and how best to manage the risk associated with those practice areas were key focuses for insurers. Insurers seek to deploy their capital on well run businesses and, due to increases in claims severity, the most prudent underwriters were on alert, asking more questions and simply declining opportunities if they were poorly presented.
Additional questions did not just come from the compulsory primary layer insurers. For the first time since abolition of the Solicitors Indemnity Fund in 2000, leading excess layer insurers introduced a specific questionnaire rather than just posing the odd question.
This ran to 18 questions, the first nine questions on specific types and values of work undertaken within the practice, along with a focus on the practice’s financial controls.
Question 10 asked for details on the firm’s cyber policy, although it didn’t ask whether it had actually purchased one. The remaining eight questions only applied to practices undertaking residential and/or commercial conveyancing.
This naturally slowed down the entire renewal process, made worse by many firms exploring their renewal options and hundreds of practices seeking a new insurer. The situation became even more chaotic in the final weeks leading up to 1 April as the impact of Covid-19 and lockdown took hold.
Covid-19 questions were also introduced and risk appetites for business were refined as underwriters became increasingly cautious, particularly to any practice with property exposures, while reviewing the financial strength of a practice became an even more important part of the underwriting process.
While some underwriters worked very efficiently and service levels remained unchanged as staff worked from home, others didn’t do so well and service levels dipped considerably.
The ‘late shoppers’, particularly those with conveyancing exposures, had difficulties sourcing coverage at all.
This resulted in a second peak renewal period, with multiple practices falling into the extended policy period (EPP). Most practices which inadvertently found themselves in the EPP have been able to find cover, but we expect that, given market conditions, some may fall into the cessation period and sadly be forced to close their businesses.
The SRA recently introduced a waiver of the rules to permit insurers some flexibility in granting an extension to these specific periods in extreme circumstances. It will be interesting to see if this is actually used.
Statistics of the spring renewal
Our data sample comes from placing more than 500 practices in March and April 2020, representing £42m of gross written premium to 16 compulsory primary insurers. Of course, each firm’s risk profile may change during a policy period, which is important to bear in mind when comparing with previous renewals.
Fee income: Our clients recorded fee income rises of 9.6% on average. Firms with four/five partners saw the most (13%), followed closely by sole practitioners (12%) and then firms with 11-25 partners (7.7%), and 26+ partners (4.9%). Income was relatively flat for firms with 6-10 partners.
Primary layer: Excluding outliers, the average rate increase for the primary limit of indemnity was 15%. Surprisingly, non-conveyancing practices saw the higher increase of 18%, against an average of 12% for conveyancing firms – although the starting position is already much higher for the latter.
Firms with six to 10 partners experienced the highest rate movement (34%), with firms with four to five partners the lowest rate (10%).
The working layer (up to £10m): Just like last October, the pricing for the working layer experienced the most dramatic increase, with an average rate rise of 76% compared to October, when rates increased by 47%.
Furthermore, in stark contrast with the primary layer, practices with property exposure felt the greater rate increase (88%). Those without saw a 38% rise.
The layer above £10m
For those practices purchasing insurance of up to £50m, premiums rose by 17% on average. The cost per million of coverage was less for practices of five partners or fewer.
Practices of 26 or more partners experienced the greatest increase (21%). As insurance capacity dries up, the cost of additional cover rises for the largest practices buying hundreds of millions of pounds worth of cover.
Policy duration: As mentioned, many insurers charged for the privilege of extended policy periods. This did not deter 19% of our clients from electing for one, although the number was a quarter down on this time last year. We believe this was more because of less availability than the fact insurers charged for the privilege.
Continuity of insurer: We placed our clients with 16 different participating insurers. This extensive market access helps us maintain our exceptional client retention rate above 97%.
Despite the array of choice, 93% stuck with their existing insurer (92% last October). Those clients that switched did so mainly due to a change in an insurer’s risk appetite, resulting in a favourable price differentiation in some instances.
New clients: We were delighted to welcome close to 100 new clients for the spring renewal. They were placed with 13 different participating primary insurers, showing there is still a large volume of active insurers despite the prevailing insurance market conditions.
Looking into the crystal ball
Regardless of where we are in relation to Covid-19, we do not anticipate the insurance market conditions to have improved by October. In fact, they could well be worse.
This could put a greater strain on some firms financially, particularly those that have paused activity. Expect to answer coronavirus-related questions, such as describing what actions you took and how you supervised fee-earners working remotely. Expect greater scrutiny of your financials.
Three tips on how to navigate the challenges ahead
1. Start early. Though the insurance market conditions will not be any easier come October, that does not mean premiums will rise for all; it will depend upon your unique circumstances.
Insurer China Re exited the market, but we understand that it still has a volume of policyholders who will need to find a new insurer during this renewal period. This means more practices will be vying for underwriters’ time.
2. Prepare a quality presentation for insurers’ consideration to help you stand out from the crowd.
3. Select your representative carefully and do not approach multiple agents as you will actually be doing your professional peers a disservice. Scattering your application across the market will slow things down even more. Not only will this reflect poorly on you, but it will also make it more difficult for you and your peers to source coverage in a timely fashion.
You may wish to consider the following when selecting your representative:
- Their expertise;
- Size of their team;
- What is their claims infrastructure? While no one wants to have claims, you should know your representative has the resources to support you in your hour of need; and
- Market reach – which insurers do they have DIRECT access to? This is an important consideration in the event of claims but also to ensure you have open lines of communication so that your message does not get diluted or misinterpreted.
Once you have selected your representative, establish an action plan with your broker that covers who they will be approaching directly and a timeline for responses.
NOTE: This blog was first published in Legal Futures on 4 June 2020.
- Five highly practical factsheets explaining how to avoid professional negligence claims in residential conveyancing, wills and probate, commercial property, company and commercial, and commercial litigation.
- A series of podcasts on risk, including: Dishonesty risk in legal service delivery - Podcast 3