Steve Ray looks at how to secure the best terms at the 2013 professional indemnity insurance renewal, and outlines the changes ahead, including the introduction of staggered renewal dates and the end of the assigned risks pool
In this article, I outline some sensible and practical steps law firms should take to ensure they are in the best position to secure the most favourable professional indemnity insurance (PII) terms for their firm. As this is the last year of the assigned risks pool (ARP), I also provide some details on the changes ahead, and touch on the subject of financial viability.
Ask to meet alternative insurers. A second opinion is prudent, especially if your incumbent insurer is looking to increase rates far more than the market norm
How to prepare for 1 October 2013
For many solicitors, the renewals process provokes anxiety – not least because this purchase is fundamental to the existence of the business itself. However, the ease of the process and the satisfactory conclusion of a renewal are highly dependent on how professionally and rigorously the practice prepares its renewal information. As usual, insurers will be scrutinising the information presented, and we would urge you to provide clear details on risk management procedures, claims history, work split and practice profitability.
A simple inventory of action points is shown below to help make the whole process more straightforward.
This is critical. A number of the problems encountered by practices at renewal are caused by starting preparations too late. So start planning ahead for the renewal in good time. Gather information about any developments in your practice in the last year and claims (if any), and be prepared to complete the proposal form early.
Meet your insurer where possible
Most insurers will tell you that they learn far more about a firm through a meeting than they ever can by reading a standard submission. Meetings with insurers enable you to convey the personality of your practice, discuss your business objectives and provide that extra detail that cannot be fully revealed in a proposal form. You can also inform the insurer of things such as positive feedback from file audits or Solicitors Regulation Authority (SRA) visits, new or updated quality accreditations (such as Lexcel or Conveyancing Quality Scheme), procedural changes implemented to improve your business, or investment in new software packages.
Ask to meet alternative insurers. A second opinion is prudent, especially if your incumbent insurer is looking to increase rates far more than the market norm.
Submit your renewal application early
The earlier a full submission is received by brokers, the smoother the whole renewal process can be. This is even more important for new businesses, because insurers have a limited budget, and therefore appetite, for new business, and as they commit to new firms, their appetite will wane and premium advantages lessen.
However, it can be argued that, when the market is ‘soft’ – that is, where insurer capacity exceeds demand, pushing premiums down – it may be beneficial to leave negotiations until late in the day, as some insurers may cut their rates in an attempt to secure a greater market share. The reverse is true when the market hardens, as insurers’ limited capacity is allocated on a ‘first come, first served’ basis.
Complete your form carefully
- Answer every question on the form. About 50% of all proposal forms are submitted incomplete, thus diverting valuable time and resources to correcting them. This ultimately delays the whole process.
- Answer each question fully. If additional space is required to answer questions, attach a separate sheet, and include reference to this in the covering letter.
- Make sure that answers are clear and legible. Occasionally, forms are received which are almost impossible to decipher. Most PII renewal forms can be completed electronically, which should assist.
- Attach the claims record from previous insurers to your renewal submission. Provide commentary on any outstanding claims which are reserved above your self-insured excess.
- If there are any insurer reserve figures which you believe to be unduly pessimistic, provide commentary on what you consider to be a realistic figure. These figures can be challenged.
Emphasise the good points about your practice. Do not be shy about ‘blowing your own trumpet’ and highlighting anything that you do which distinguishes you from competitors.
If your firm undertakes property law, you should also explain how that work is sourced. For instance, repeat customers and referrals are deemed to be lower risk than work arriving from unknown parties or property developers. Also, we recommend that you provide details of the level at which the work is handled within the firm, and the supervision process.
Finally, provide details of any remortgage work, as this attracts a lower rate than full conveyancing work.
End of the common renewal date
This year’s renewal presents the first opportunity for insurers to provide renewal dates at any time during the year. The rationale behind this change is to try to mitigate the difficulties faced by practices in obtaining cover when underwriters are overwhelmed by the volume of proposal forms requiring their attention. We are hoping this will have a positive effect on premiums. Analysts have previously commented that the single renewal date intensifies the market cycle, which can lead to practices paying lower premiums in a ‘soft’ market and higher premiums in a ‘hard’ market. The change should help to promote flexibility and choice for law firms, as well as assist practices to obtain premiums which more accurately reflect their individual risk exposure.
On 1 October, insurers will have the option to offer policies for periods longer than 12 months. Some insurers will be better placed to deal with this than others. It will, of course, be the choice of the individual practice to decide upon the renewal date best suited to their cashflow and work commitments. It is likely that a significant number of firms will remain at 1 October, as the process may take some time to evolve.
Firms should engage with their broker to understand what options are available and to find the solution which works best for them.
End of the ARP
The ARP was effectively a fail-safe built into the minimum terms and conditions of PII on commencement of the open insurance market after the end of the Solicitors Indemnity Fund in September 2000. Rather than allowing a firm to fail because it could not attract an insurer to provide it with insurance, the ARP allowed it to continue to trade with insurance (albeit at punitive rates) provided by the qualifying insurers, which then shared the premium and the claims.
This arrangement carried along without too much alarm until 2008, with the average number of firms in the ARP remaining relatively low – at 42 in 2005-2007 – and relatively static. But in 2008, a number of insurers started to withdraw from insuring smaller firms, especially in the residential conveyancing market. Any overall move in the total premium pot was compensated for by Quinn, which doubled its participation from the previous year and took almost 10% of the primary solicitors’ insurance market, making it the fifth largest insurer by premium written (Quinn later went into administration, in March 2010). In 2008, we also saw the number of firms in the ARP significantly increase; indeed the figures were really quite frightening. In 2008, the 166 firms which entered and remained in the ARP should have paid £5.5m in premium; in reality, insurers only collected £2m, as the practices either couldn’t or wouldn’t pay. The incurred claim position stood at £40m – or to put it another way, for every pound a participating insurer collected in premium from the ARP, it was likely to pay in excess of £20 in claims. Also bear in mind that a practice going into liquidation while in the ARP effectively saddles the ARP with six years of run-off, for no further premium consideration.
As of 1 October 2009, over 600 firms had requested the ARP papers, meaning that they believed they would not be able to obtain qualifying insurance by the required date. As it was, deadlines were extended, and 309 firms entered the ARP. Insurers lobbied, via the Association of British Insurers, Law Society and SRA, on a number of issues to attempt to address the significant drain on their resources.
A number of new steps have been agreed in the last couple of years to lessen the impact of the ARP, which has culminated in the end of the ARP at this renewal.
After its closure, insurance coverage will continue for firms already in the ARP, although they will no longer be trading. Firms that would normally go into the ARP will have to shut down, and their insurer at that point will pick up the six-year run-off cover.
There appears to be confusion on this point, with some individuals referring to the financial viability of insurers and others to the financial viability of firms. There are indeed concerns on both sides.
Turning first to the insurers, as the Law Society commented: “We understand the pressures on small [law] firms, but discriminating purely on the basis of price [of the policy premium] may be a false economy, and may cost you dearly in the long run. It is imperative therefore that you take appropriate measures to evaluate the financial security of prospective insurers.” (See tinyurl.com/p2r65ta.)
Part of the issue has been that insurers, by agreeing to accept solicitor practices under the minimum terms and conditions, became “qualifying insurers”; many law firms felt this gave them comfort that these insurers had met some financial criteria. In fact, the regulator had never specified a minimum security rating, and, after many years of debate, the Law Society asked the SRA to change the name to “participating insurer” for the 2013 renewal – being, in its opinion, more reflective of the insurer’s actual role.
The significant books of business built by Quinn and Balva, and to a lesser extent Lemma Europe, should provide cautionary tales for firms weighing up possible price savings with an unrated or newer-rated carrier versus an experienced long-term supporter of the profession.
Concerns over the financial viability of firms were first raised in a speech by an SRA executive following the financial failure of Cobbetts. It was intimated that the SRA had concerns over the ongoing viability of firms of all sizes, and would be committing resource to monitoring firms against a number of financial warning indicators. This is partly due to the prolonged downturn, but also because of the shake-up of the legal profession following recent developments such as the Jackson reforms, some of which squeeze the profitability of certain specialisms. It is clear that some firms have taken steps to ensure that they are able to embrace the changes, while others have been slow to react, which will presumably put them on to the SRA watch list.
This is, of course, also a concern for insurers, since, after the demise of the ARP, an insurer of a firm failing during its insurance tenure will be left with six years’ run-off. Care is therefore needed from both sides of the insurance transaction.