The hardest Professional Indemnity Insurance market in memory?

Law firms renewing their Professional Indemnity Insurance (PII) in England and Wales on 1st October this year experienced arguably the toughest market conditions the profession has seen since the demise of the Solicitors Indemnity Fund in 2000. Even pre-Covid, a hard market had been on the horizon for some time. The practical and economic effects of the pandemic further compounded the situation, leaving most (but not all) firms facing rising renewal premiums and a distinct lack of viable alternative competition for their business.

Gareth Milner, Client Director at JM Glendinning Professional Risks, examines this year’s renewal, the challenges faced and the positives we can take into the 2021 PII market:

It has been well documented that the PII marketplace in general has been under scrutiny since 2018. This has caused underwriters to be more forensic in their analysis of premiums, claims performance and profitability across all their PII clients. One knock-on effect here is an apparent lack of appetite from new insurers to enter the Solicitors’ PII space. In 2019 China Re and OMNYY exited the market, but no new capacity has come forward to replace them, although it should also be noted that the market saw no further insurer withdrawals in 2020, which is a hopeful sign for the future.

Premium levels were not the only issue during the renewal process this year. The combination of insurers having a heightened focus on the performance of their own PII business, with the impact of Covid-19, led to most PII providers asking for more information in some key areas at renewal:

• Accounts; nearly all insurers made sight of last 3 years’ accounts for a practice mandatory, with most asking pertinent questions around assets, liquidity and the ongoing financial viability of firms.
• Covid-19 actions and planning; insurers understandably wanted to know how firms had dealt with the first phase of the pandemic (such as how many staff they had furloughed if they had taken a business support loan etc)
• Sector-specific issues; most insurers placed a greater spotlight on Conveyancing work, with some insurers applying tougher upper limits of conveyancing exposure.

The other aspect of ‘the Covid effect’ was a practical one. With most insurers’ staff working remotely, there was a natural impact on the speed with which proposal forms could be examined, premiums produced and final negotiations completed / signed off. So not only were premium increasing, they were often delivered later than in a more straightforward market.

Additionally, we saw a few PII providers limiting their exposure via other risk control measures: increased excesses (either specifically for property work or across all claims) and/or removal of the capped excess. Anecdotally, we also saw at least one insurer looking to impose a Personal Guarantee on the Partners in respect payment of the premium, policy excesses or potential run-off premiums. Such actions demonstrate insurers’ ongoing concerns about payment of premium in the event a business fails. Perhaps to reflect these concerns, in a stark warning in September, the Law Society PII committee actually issued a piece suggesting firms may wish to consider closing early rather than risk increased run-off costs resulting from higher premiums after renewal (Law Society Gazette, 07/09/2020).

There were also continued challenges with the excess layer marketplace for firms seeking cover above the compulsory limits with rate increases for those layers typically higher than for the primary layer. This sector of the market continues to suffer from a lack of competition and insurer capacity.

This all suggests that the October renewal was a tough one for nearly all firms. Having done an analysis of our client base, JMG Professional Risks clients experienced an average overall premium increase of 18.9% compared to the figure they paid at last renewal – remembering that for some, this will have been in April 2019 if they had an 18 month policy period.

However, hard markets tend to gather their own momentum and perhaps some of the press coverage during August and September was not particularly helpful to firms seeking to control any premium increases!

As always, a considered and balanced broking approach combined with a strong relationship between the insured, their broker and the insurers themselves appears to have produced better results for many firms than the press speculation suggested.

All of that being said, we do recognise that the above paints a difficult picture and that many firms simply ‘survived’ this renewal period, what positives can we take into the PII market and how firms manage risk for 2021? Here, we believe there are a few:

– Covid-19 has accelerated the digital transformation of law, as well as causing firms to closely examine their processes, cultures and client propositions. Ultimately, this will lead to the good firms emerging stronger and either presenting themselves as an improved risk to insurers, or at least being much more aware of their risk profile and taking actions to address this.

– A very traditional Professional Indemnity Insurance market is learning similar lessons; insurers and brokers are having to adapt, recognise what their client base needs and improve their offerings / service levels accordingly.

– Firms examining new models, or those stepping away from traditional, established businesses to start up on their own, are finding cover in the market. This changes the overall risk profile of an insurer’s book of business, which in turn may lead to them having an increased appetite for legal businesses at future renewals (even if there are no new entrants to market).

– No hard market lasts forever, and typically these conditions are much shorter than softer / more benign markets. With the recent announcements around a potential vaccine for Covid-19, it is possible that underwriters will have a more positive outlook for renewals in 2021.

As ever, the key to securing favourable quotations comes down to how your business is presented to the market and understanding your options as early as possible. We are already working with our insurer partners, clients and new firms to explore their options prior to next year. If you would like more information, please don’t hesitate to contact one of our team.