Hardened PII Market To Stretch Beyond 2020 Renewal Process
The hardening PII market could be set to expand beyond the April 2020 renewal process according to an industry expert.
The second largest global insurance broker, Aon, announced the withdrawal of their Managing General Agent, Maven Underwriters, from the solicitors’ Professional Indemnity Insurance (PII) market in August. This has led many to speculate on the future of the insurance market for solicitors.
As the PII exodus continues, some law firms will be anxious at the potential to be stranded prior to their renewal date.
With a lack of new entrants and the possibility of further reduced capacity, existing insurers could increase premium rates further, creating a very uncomfortable environment for the legal sector.
Jenny Screech, a Legal Consultant with Howden Insurance Brokers, offers her unique insight into the sector, looking at the current state of the solicitors’ PII market and what it could mean for the future.
What attributing factors are causing insurers to leave the PII sector?
In recent years, the renewal of PII has been relatively straightforward for most firms, with plenty of “A” rated insurer capacity and no significant movement in premiums. The landscape began to change following the intervention of Lloyd’s of London in July 2018. Their thematic review highlighted the poor performance of non-US PII generally and called for remedial action across their syndicates. This approach has filtered across to the company markets. The change was clearly evident at the 1 April 2019 renewal for solicitors. It is continuing as we move towards the 1 October renewal and we have seen some underwriters leave the solicitors’ PII market, and others are increasing premiums.
Claims activity is at the core of the issue. Unfortunately solicitors have always had a very high level of claims activity compared to other professions. The breadth of the Minimum Terms and Conditions (MTCs) required by the Solicitors’ Regulation Authority, with which the primary £2 – 3m cover must comply, further compounds the issue.
Losses from conveyancing work have always been a particular problem and insurers are currently seeing significant claims in this area arising from failed buyer-funded developments. Claims arising from onerous ground rent clauses and a potential for fallout in the property market as a result of Brexit are also on the radar.
Solicitors’ PII also has what the insurance market refers to as a very long “tail”. This means that claims can be slow to emerge and develop. For example, if a matter is notified as a circumstance today, it might be a number years before a claim is made with even more time until it is resolved. This means that it is always some time before an insurer will have certainty regarding the level of loss on a particular underwriting year. This makes it challenging for insurers to manage their pricing strategy in this sector. If cover has been under–priced over successive years, then the accumulating losses can ultimately lead to an insurer withdrawing from the market.
What will a hardened PII market mean for law firms and solicitors?
In general terms a hardened PII market means higher premiums and a reduced choice of insurer, but it is useful to look in a little more detail at what happened at the April 2019 renewal and what we are currently seeing as we move towards the October 2019 renewal. There are two stories to tell, as there is a marked difference between the primary (compulsory) £2m or £3m policies and the excess layer cover above this.
The primary £2m or £3m cover is where most of the premium is focused, being the layer that is the most vulnerable to claims. This is a real area of concern for firms, as any increase can be significant in money terms. In previous years, a firm’s growth in fee income would sometimes be absorbed and the expiring premium maintained – thereby achieving a rate reduction. That has changed this year. If gross fees have increased, then it is being factored into the calculation, with the increased rate applying across the total gross fee income.
We are seeing a variation between insurers as to the level of increase they are imposing. Some insurers apply increases more heavily towards certain areas of practice and/or to those firms with a more challenged claims experience. Insurers are always keen to retain the more profitable business and accordingly the rate increase for a firm with a good claims history will generally be at a more modest level than another more challenged firm, despite them having the same insurer.
In the excess layer market there is reduced capacity and the rate increases are higher. There has been an increase in the value of claims in recent years and more claims have been hitting the excess layers. It is therefore no surprise that we are seeing rate increases ranging up to 100% in this area. While that is high as a percentage figure, the excess layer market has been very cheap historically. The increases are being applied to what is a very modest starting point, and are therefore manageable in “money” terms. Excess layer cover still represents value for money and is an important aspect of your insurance programme – but make sure that you understand the scope of that cover. It does not always follow the terms of the primary policy, which is subject to the very broad MTCs.
How can law firms ensure they receive a favourable premium from PII insurers?
Start the renewal process early. Proposal forms take time to complete and when there is a hardening market it is not wise to leave matters until the 11th hour. We also encourage our clients to include a letter or note setting out information highlighting the qualities of their firm that do not emerge from the answers on the proposal form. Be concise – two to three pages is enough. Put yourself in the shoes of your insurer and focus on issues that are likely to make a difference. For example:
- The quality and culture within your firm
- Risk management initiatives within the last twelve months
- Particular specialisms within the firm
- Details regarding higher risk areas of practice that make such work lower risk in your particular firm
- Whether your business receives valuable assistance from outside support firms such as Symphony Legal.
Strong broker and insurer relationships are also key in a hardening market. At Howden we have strong relationships with insurers who are committed to the profession. We have direct access to a wide range of “A” rated Participating Insurers and it is this capability that assists our clients to mitigate hard market conditions to keep PII premiums at competitive levels.
What will prevent insurers from leaving the PII market?
Historically solicitors’ PII in England and Wales has been attractive to insurers due to the level of premium income, or “top-line”, it generates. However as the old adage goes, top-line is vanity and bottom-line is sanity. Like any other business, insurers need to make a profit. The Lloyd’s review confirmed that non-US PII was failing badly – and solicitors’ PII sits squarely within this group.
If premiums return to a level where the business becomes profitable, then we will inevitably see fewer casualties such as the recent departures of Aon/Maven, Omnyy and Libra. A reduction in claims against solicitors could achieve the same result. An on-going focus on risk management within firms, a reform of the conveyancing process, and the use of third party providers for holding client funds are all issues that could have a positive impact.
How do you envision the PII market responding in the next 12 months?
Our current view is that the hardening of the solicitors’ PII market could continue through to the next significant renewal date of 1 April 2020. A return to profitability is clearly the key issue as explained above, but there is a level of uncertainty as to how long that will take. In addition to monitoring the level of claims activity against solicitors, we also need to keep an eye on the losses within the wider PII sector and the insurance market in general. Major catastrophes (hurricanes, fires etc) and other events that cause significant losses to the wider insurance market can also influence the position.
The best advice we can give is to stay informed. It is not all “doom and gloom”. While rates have hardened and some insurers have reduced their appetite, there is still plenty of “A” rated capacity in the solicitors’ PII market. Ensure you maintain contact with your broker over the coming months, so that you know what to expect. You can then adjust budgets and take all possible steps to ensure the most favourable presentation of your firm to insurers as your next renewal approaches.