Charles Hawtin, client service manager at Chancery Pii, reviews the SRA claims data findings and asks whether the data proves PII premiums are too high.
The Solicitors Regulation Authority (SRA) is looking at professional indemnity insurance (PII) reforms again and this time with data. For the first time, claims data from insurers over a 10-year period has been collated and published. The data will allow us to understand whether PII premiums are too expensive and whether a reduction in the compulsory minimum limit of indemnity will result in reduced insurance costs.
The SRA required all participating insurers who signed up on 1 October 2015 to provide claims data from 2004 to 2014. The headline figure from the report is that over this period solicitors’ PII claims amount to a staggering £1.96bn against an estimated premium income of £2.35bn. This would indicate that insurers are making a profit. However, the claims data has two flaws:
Firstly, it has only been collected by insurers who were participating insurers as of 1 October 2015, which means that the claims experience from the likes of Quinn, Elite and Balva were not included. If we included the premium income of those insurers who have withdrawn from the market over that 10 year period, this equates to 18 per cent. Therefore, the claims figure would be to nearer to £2.3bn or on average £231m per annum.
Secondly, due to their nature, the value of PII claims develops over time. The claims experience provided by insurers has been developing since 2010, meaning that the ultimate incurred position is likely to be underestimated. If the figure was adjusted to take into account adverse development, this would add a further £43m per annum, meaning that on an annual basis solicitors’ claims cost, on average, in excess of £273.5m.
In addition, insurers need to account for costs and expenses and an element of profit. Taking all of the above into account, we estimate that the amount of premium income insurers would require to achieve a level of profitability would be closer to £369.5m. Therefore, whilst the SRA may have hoped that the claims data would support the notion that PII reforms would lead to reduction in premiums, the data shows that insurers would potentially need to increase premiums by around 21 per cent to break even, or 35 per cent to achieve a profitable return.
If we look at the solicitors’ PII market as a whole, of the 28 insurers in the first year of the open market, only six have consistently written solicitors’ PII at every renewal since. Our own research shows us that, since 2000, the average period that an insurer has written solicitors’ PII for is just six years. Focusing specifically on the one-four partner space the position is even starker, with insurers providing terms for just four years before withdrawing. Our view is that the current market conditions are unsustainable in the short-term and we will see a contraction in the level of competition.
Whilst for many renewal may seem a long way ahead, we recommend you look carefully at your insurer and your broker. At this stage, our advice would be not to risk relying on a non-specialist or sales-driven broker who offers you price and price alone, no matter what they may have achieved for you in the past. The fast approaching reality is you will need a specialist with direct insurer relationships, expertise and know-how to help you navigate more challenging conditions than experienced over the past couple of years.