Better times ahead?

By Chris Marston, LawNet's chief executive 

Professional indemnity insurance (PII) for solicitors in England and Wales is, for most firms, the biggest business expense after people and premises. It is mandatory, the number of providers is limited and, since the year 2000, it has been subject to the vagaries of the market.

Insurance markets are cyclical, affected not only by claims experience within the class of insurance involved, but also by wider influences such as extreme weather, natural disasters, armed conflict and economic conditions. Attempts by the Solicitors Regulation Authority (SRA) to reduce the extent and scope of PII were thwarted by a coalition of interests – that is, by the Legal Services Board, the Legal Services Consumer Panel, and the profession itself (through the Law Society and other representative groups).

In this article, I discuss the current market and consider whether there are better times ahead for PII.

A hard market
The usual cyclical pattern in the solicitors’ PII market was disrupted for several years by new entrants to that market, bringing competitive pressures to bear that held premiums down for longer than was sustainable. Some of those new entrants proved troublesome; for example, when firms insured by the unrated Alpha were removed from some lenders’ panels, or when Irish insurer Quinn and Gibraltar-based Elite Insurance suffered financial collapse in 2010 and 2016 respectively.

Throughout this period, property prices rose steadily, disputes on wills became likelier as more families moved away from the traditional nuclear model, and the increasing incidence and severity of claims arising from cybercrime and ‘Friday-afternoon fraud’ was startling. A correction was inevitable. From 2018, the unusually long benign period for PII ended, and insurers began to move premiums up to reflect their view of the risk. At the same time, their appetite to insure new risks reduced greatly, dampening competition.

Data shared at the May 2021 Leadership and Management conference showed claims exceeding premiums over the preceding ten-year period – it did not include data from insurers who had left the market, whose experience may well have been worse. These numbers, and the thematic review undertaken by Lloyds of London, forced PII insurers to address the issues. They began asking more searching questions in relation to risk management, financial stability, risk culture and supervision – especially with remote teams now a major feature in so many firms. They also started to set limits for conveyancing work at an individual firm-level rather than on a portfolio basis, meaning they would no longer offer terms to some firms. And it became fairly common for insurers to ask for personal guarantees from partners to cover the run-off risk that they would face if a firm ceases to trade.

The hard market of the last few years has been tough for many firms, especially those whose work includes a high percentage of conveyancing (whether that be residential or commercial). The cost of PII has risen considerably since 2018, with an increase in the ‘rate on fees’ (that is, the premium expressed as a percentage of fee income). According to Latest trends in professional indemnity insurance for law firms, which was published by the Law Society in July 2023, firms experienced, on average, a rise from 4.9% of their fees in 2017 to 8.8% in 2022 – almost doubling the cost, assuming a constant fee turnover. For the many firms that experienced business growth or suffered significant claims in that period, the effect was even greater.

Signs of improvement
A change in market conditions can only be driven by market forces. A halt in the price-rise trajectory could be caused by some, or all, of the following factors:

◼ increased appetite from established insurers, based on a more attractive risk and return profile for solicitors’ PII business

◼ more competition between existing insurers, driven by new business targets

◼ insurers who have previously considered the market unattractive entering the sector and providing additional competition; and

◼ a marked and sustained reduction in the incidence and severity of claims.

The former is more achievable through improved risk management, but there is little evidence of it beginning to happen. The latter is a huge challenge, given that so many claims arise in conveyancing and in wills and probate – both of which are strongly influenced by rising property prices. And cyber claims are not only typically for large sums, but also crystallise immediately for the insurer.

Most firms still renew their PII at the traditional renewal date of 1 October each year, so the renewal season that took place at the end of 2023 is a good indicator of whether the market is beginning to change. And, certainly, based on discussions with several brokers and the experience of LawNet member firms, my initial observations do suggest a change in market conditions:

◼ There has been more competition between insurers, with their retention rates decreasing as more firms were able to switch to a better deal elsewhere than in recent years.

◼ Though never a factor for firms in the LawNet scheme, I’m aware that discussions about requiring personal guarantees for the run-off liability do not seem to be taking place anymore.

◼ Some new and returning insurers were looking to write more business and do so cautiously and selectively.

◼ Others mounted campaigns, targeting a part of the market that they find particularly attractive.

◼ Anecdotally, more firms were inclined to speak to an alternative broker or insurer to test the market.

The rate-on-fees experience has been positive for many, with an average reduction of around 7% and some firms seeing that rate fall by two or three times as much. I mentioned earlier the impact of growing fee turnover, and, in this respect, it is important for firms to explain in their insurance proposal what is behind their growth. Is it in a particular area of work, and is that area regarded as high or low risk for the insurer? Has it arisen simply because prices have been increased? It is reasonable for an insurer to assume that higher fees represent more work – and therefore more risk – but if a firm can demonstrate that it did no more work, but simply charged more, that can persuade insurers to think again about the premium.

This latest renewal season has seen more instances of co-insurance, with some firms experiencing the concept for the first time. Firms have been accustomed to any top-up layers being insured by several parties, whereas, for many, the primary layer has generally been insured in the past by a single underwriter. This year, especially for larger firms, it has become more likely that the primary level is co-insured; this helps spread the risk for insurers, particularly in cases where they might have concerns about the concentration of conveyancing work. (In our own network, we took an active decision some years ago to include co-insurers in our scheme, to give us more options if our lead underwriters were to decide to exit the PII market.)

There will always be a larger issue causing insurers to ask new questions – and it will surprise nobody that the hot topic this year is the Building Safety Act 2022.

Preparing for next time
The majority of firms will not renew their PII again until 1 October 2024, though the next sizeable tranche of renewals will take place on 1 April 2024, and it will be interesting to see whether the more positive direction of travel that I have described will continue.

Whenever your renewal is happening, I urge you to plan ahead and spend time putting forward your risk management story in the best possible way. Let’s take, for instance, a firm with fee income of £2m and a PII premium of, say, £120,000 (6% of fees). How much would you have to bill to make £120,000? According to the Law Society’s Financial Benchmarking Survey 2023, the median net-profit margin of respondents was 21.7%, suggesting that a firm would have to bill £553,000 to generate a net profit of £120,000. Spending time on efforts to get the best PII outcome surely makes sense.

Below are my thoughts on how to prepare for your firm’s PII renewal.

Give it priority
Treat it as if you are pitching for a very significant piece of work. Every £1,000 you can save on your premium would require over £4,500 of billing to create a net profit of a similar size, so it deserves to be treated as a pitch rather than a chore.

Start early
Get submissions to your broker in plenty of time. As a minimum, this should be two months. Allowing time to discuss any queries and for insurers to reflect will always play to your advantage.

Spend time on your presentation
Leave no stone unturned, as gaps or incomplete information could see your proposal rejected. And remember – the proposal form is a starting point, not the end of your submission. You can add value to your pitch by including relevant information that paints a more vivid picture and is easily digestible, such as process diagrams.

Show how you learn
Demonstrate how you adapt your processes in light of your experiences. We ask our members to do an overview on the risk management processes at the firm and how their frameworks limit risk. For example, when a claim occurs, what is done to prevent recurrence? If a trend is detected, what is done to tackle it? What policies have you refined or introduced? How have you used root-cause analysis to identify the real reasons for claims – claims which might, at first glance, seem unconnected? How do you dovetail your continuing competence obligations to the SRA with effective training in risk management for everyone at your firm and anyone else affected?

Wellbeing and supervision
Insurers want to dig below the surface. They want to know how you have operated and adapted to the changes that we all saw after the pandemic struck in 2020. How does your firm manage remote and hybrid working, ensuring that supervision is effective and that your compliance and regulatory obligations are being met? What is your firm doing to support the mental health and wellbeing of its people? How will you guard against fatigued or poorly motivated people making mistakes that could give rise to claims?

Closing words
There are some encouraging signs that the next renewal will bring more good news for the profession. Why not make this even better by getting organised early on so that you can put your best case forward when the time comes?

This article first appeared in The Law Society's publication Managing for Success, January 2024.