Solicitors’ PII renewal
For the first time in years, the solicitors’ professional indemnity insurance (PII) market is in a state of flux. The SRA’s controversial proposals for insurance reform, combined with the exit from the market of long-standing providers, means lawyers are entering a period of uncertainty in the run up to the traditional renewal date of 1 October.
For several years, no news has been good news for law firms - the solicitors’ market has been generally benign and, subject to claims experience, most firms have found premiums to be stable. That position is changing. There is clear evidence that the enduring soft market is starting to harden.
This article discusses the main reasons for a tougher market and provides some tips for weathering the storm.
The SRA continues to review the mandatory requirements for solicitors’ PII. Its current proposals for PII reform - that the “one size fits all” rules should be changed – have put the cat amongst the pigeons. It proposes that:
- The level of compulsory cover should be reduced to £500,000 (£1 million for conveyancers)
- Cover for clients with a turnover of £2 million plus should not be subject to minimum terms and conditions
- The limit for run-off cover should be reduced to £1.5 million in the aggregate (£3 million for conveyancers)
- Insurers should be permitted to limit defence costs and to apply an excess to those costs
- The eligibility criteria for the compensation fund should be stricter.
The SRA has made these proposals in the light of data covering 2004 to 2014, which suggests that 98% of claims were settled for less than £500,000 and that the current mandatory level of indemnity is disproportionate to the actual risks faced by most firms.
Insurers, brokers and the ABI have raised concerns about the SRA’s proposals. Apart from fears that PII placement will become more complex and that some claims would not be covered if the changes are adopted, it is felt that any premium discount which might be available in return for a reduced level of cover would not be significant. One specialist PI broker estimates that premium savings may be between 0 and 10% in exchange for a 75% reduction in cover. Also of concern is that the data collected refers only to paid claims, not ongoing reserves.
A decision concerning the SRA’s plans is likely to be made early in 2019.
Exit of insurance providers
For several years following the move from insurance through the Solicitors’ Indemnity Fund to commercial placement in 1999, the solicitors’ market was flooded with unrated providers which took the lion’s share of the market one year (significantly under-cutting established providers in the process), and were declared insolvent a year or two later.
Since 2014, the market has been relatively stable, with steady insurance capacity fuelling highly competitive rates set against an increasingly benign claims landscape. For years, margins for solicitors’ PII have been thin or, in some cases, non-existent.
Following a £2 billion loss last year, Lloyd’s has recently launched a strategic review of all aspects of its business. Lloyd’s intends to review the bottom 10% performing lines and has challenged syndicates which write PII to reconsider their business plans to ensure future profitability.
Since then, Libra Managers withdrew from the solicitors’ market and Aspen have pulled out of writing PII. With exits from Brit in 2017 and Novae and Channel earlier in 2018, the number of established providers has definitely contracted, but the appetite of those providers who remain has improved.
The excess layer market for solicitors has certainly hardened, with an increasing number of claims exhausting the primary £3 million layer and eroding the first excess policy. Those buying extra cover for the April 2018 renewal date experienced rate increases. This was not particularly surprising – excess rates have remained modest for some years.
The general insurance landscape
Whilst the number of solicitors’ PI claims and notifications has remained steady for some time, the industry as a whole is facing an expensive year following hurricanes (Harvey, Irma and Maria) and the Californian wildfires. This experience is likely to put pressure on rates and lead to a general hardening of insurance rates.
Developing case law
Insurers may be even more anxious than before about insuring conveyancing work following the decision in Dreamvar v Mischon de Reya. Whilst, in our view, that case is distinguishable on the facts, on its face it imposes strict liability on solicitors to ensure a seller of property is its true owner. It is easy to see how insurers might consider premium hikes necessary to maintain acceptable net loss ratios.
- Consider a specialist PII broker, with access to the market and a strong claims team - which will help with presentation of the risk, as well as of claims.
- Spend time on your presentation, making sure that any claims issues are presented in a way that makes it clear you have addressed the issue and the problem is unlikely to repeat itself. Risk management is key.
- Do not leave submitting your proposal form until the last minute.
- If you handle conveyancing, review your anti-money laundering procedures and client identity checks and ensure your fee earners are trained on fraud indicators.
- If good terms are available, consider whether it suits your firm to have an 18-month period of cover. Your broker may be able to advise on the likely impact of the SRA review on your premiums.