Be Prepared – Surviving The Next Insurance Renewal

This article is reproduced with the kind permission of Enderley Consulting Limited

A conversation between Dr Anne Austin, CEO of Enderley Consulting and Jim Brindley of tlorisk, Professional Risk Insurance Specialist

Anne caught up with our friend, Jim, professional indemnity insurance broker, to get his views on what law firms should do before their October insurance renewal, particularly in the light of the impact of COVID-19.

How are insurers preparing for the next insurance renewal round in October 2020? Is this going to be different to previous years due to the pandemic?

2020 was going to be a tougher year before the pandemic, with some insurers exhibiting a marked desire to reduce new business activity, mainly focusing on renewals from existing clients. The reduced insurer capacity seen in 2019 hasn’t improved and many insurers increased rates in April this year.  The SRA guidance on extension reflects the problems that firms were having last October and in April this year. COVID-19 has complicated the picture and will make it tougher. It is difficult to say how insurers will react as they, like the rest of us, are trying to work out the implications of the lockdown for their business and the economy.

Are there any symptoms of that additional caution amongst insurers?

Insurers are very tight-lipped at present. What we are seeing is extreme caution from them about the coming renewal season.  I am aware that discussions between insurers and the SRA on the minimum terms cover for 2020/2021 are ongoing and we could see potential changes to reflect the current global situation. I have noticed that insurance proposal forms are probably later being issued this year because underwriters are still working out the risks that they will underwrite and trying to price those risks accordingly. In practice, firms will have to be ready to put in the proposals with less time than usual because of that situation and be prepared to answer many new questions.

What is the key issue likely to be for the insurers?

The financial resilience of the law firm; insurers can look at annual policies in terms of seven-year risks periods because of the potential of run off cover.  Firms are a riskier prospect for the insurer if there is a probability of them ceasing to exist or being unable to pay the excess on claims. In turn, insurers may charge higher premiums or even refuse cover if they are unconvinced by the firm’s financial resilience. The lockdown has resulted in mixed financial effects – reduced revenue from fee income, slowing down of cash-flow and increased investment so personnel can work at home. However, government support including the furlough scheme to offset staff costs may ease cash-flow.   Firms should expect to see additional questions on the proposal form relating to COVID-19 and even additional supplementary forms concentrating on the impact that COVID-19 has had on them both financially and on a risk management level.

If there is a recession, we can expect to see a potential rise in claims as creditors chase money that they cannot recover because of a solicitor’s negligence. Previous recessions taught us that home repossessions by mortgagees result in more claims as they find that due title problems that were not spotted or reported. The ability of firms to show insurers that they will still be around to share those risks in 18 months or even 3- or 4-years’ time is crucial.

That sounds nightmarish…

I can see several potential scenarios regarding affordability of insurance this year.  Many law firms have, to date, paid their annual premium through their cash reserves in one lump sum.  This year I anticipate firms wanting to hold on to these reserves and so opt to pay monthly.  However, some firms may struggle to get finance to pay for their insurance cover or will be charged a significant amount for finance.  Finance firms cannot request cancellation of this type of policy because of non-payment.   In addition, the potential for insurers to provide run off cover due to a firm ceasing trading is far greater during an economic downturn, increasing the possibility of an insurer not being paid for providing run off cover. That prospect together with a chance of firms not paying the excess payments makes underwriters very jittery.

Do not expect insurers to base their quotation on reduced revenues in 2020. They will review your last accounts which, for many law firms renewing in October, will be for a year end in March, before the economic effects of coronavirus bit. Consequently, if you had an excellent year in 2019-2020, they will calculate your premium against that information and not the projected revenues for 2020. You will have to wait for 2021’s renewal to catch up.  I am sure there will be many a discussion to be had with underwriters and clients regarding fee incomes.

So, it really is a perfect storm. Is there anything law firms can do to help themselves in this situation?

Fortunately, yes. The first thing is to not let the proposal form sit on your desk until the last moment. Sending it in at the last moment to your broker severely restricts your ability to get the best potential outcome. A firm will need time to discuss with the broker alternative options if a firm has disappointing news on their premium or worse still a refusal by their insurer to offer renewal.  It increases the risk that you may have to run into a renewal extension period. Avoid running into that extension. It is a red flag to insurers as it suggests the firm cannot run an efficient business and therefore is a riskier proposition.

Also, law firms need to have a good remote working infrastructure including proper policies and supervision arrangements. Remote working has been flourishing in the last few years, but firms have allowed that to occur haphazardly. The explosion in home working because of lockdown will increase the potential for risk for insurers. Data protection, confidentiality and cyber-security all become bigger risk areas with employees using their own equipment to access office systems. The connection between the office platform and the home PC introduces an extra point of vulnerability for hackers.

This is stuff is all real and firms cannot hide their heads in the sand about it. Insurers are not. Questions around home working have been on the proposal form for several years now. I expect more focus on that.

And how about financial resilience?

Concentrate on how you provide evidence of financial resilience. Many law firms – even the largest – have few, if any, reserves. Partners need to think about that. Even though interest rates remain at a historic low, it may be better to have a plan for building reserves than making capital investments such as office redecoration.

Good revenue protection plans can be helpful. If you are a high street firm in a market town, you will get some work through people popping into the office – particularly older clients. Social distancing regulations will restrict footfall in offices leading to less fees. So firms should be looking at contingency plans to protect the revenue from otherwise foreseeable fall off. Better credit control, more efficient billing and good client management are all ways of protecting your revenue. Protected revenue leads to a demonstrably more resilient business, and that is what insurers look for.

Do insurers take law firm accreditations into account when considering proposals?

Having a recognised accreditation awarded by an independent assessor such as LEXCEL carries weight with insurers. If a law firm has an accreditation like Cyber Essentials/ Essentials Plus and CQS, they understand measures are in place that are actively monitored against the firm’s risk management policy. That accreditations have to be renewed gives further comfort that owners, partners and managers are being proactive.

So, the advice is to prepare early, prepare well and manage your business properly?

Absolutely.

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