Law firms face rocketing professional indemnity insurance (PII) costs with an average rise of 30% over the last two renewal seasons with little evidence of any easing soon. Wesleyan Bank’s John Clarke considers the main trends behind these unprecedented rises.
Rising insurance costs has led to nervousness for many practitioners about the strain it’s putting on firm finances. As the Lexis-Nexis Bellwether 2021 report finds 66% of the 305 respondents felt that PII premiums were the biggest threat to business while 54% have fears about even being able to secure and renew their PII cover.
Why are insurance costs rising so much?
Insurers have concerns about the sector having come through a challenging 18 months and while insurers are still unclear about the full impact of the pandemic, they are concerned with ongoing economic pressures and what the shift in working practices has on firms. This is creating an uncertainty which leads to perceived increases in risk levels and with it, increasing premiums.
Other factors are also in play. Greater use of IT, particularly remote access to practice and case management systems means more potential for unauthorised data breaches and losses. Insurers want to be reassured that safeguards are in place against cyber or ransomware attacks.
This is creating an area of contention between insurers and the policy holders which has been labelled as ‘silent cyber’. Within policies it can be unclear as to how much cyber-related cover is provided as cyber protection is not implicitly mentioned in many policies and some insurers think that special cyber protection policies should be in place. This has created a void leaving many firms exposed should a cyber-related issue occur.
The Solicitors Regulation Authority (SRA) has intervened and is changing its minimum terms and conditions so insurers must have a clause explicitly mentioning cybercrime and explaining what losses fall within the scope of the potential claim. Insurers can continue to offer stand-alone cyber policies, but it will not be mandatory to buy separate cover.
This clarification mustn’t lead firms to believe that this provides some mitigation of responsibility in ensuring that staff know about cyber risk and are correctly trained in the managing and maintaining
Insurers are likely to want to see evidence of active cyber and IT risk management processes alongside on-going training, management, and supervision for staff both in the office and those working from home as part of the renewal proposal to ensure there are sufficient practices in place.
Other risk indicators
There are also indications, highlighted by broker Lockton in its April 2021 renewal season review, that insurers believe certain practice areas are bringing an increased risk profile.
Among these are property and conveyancing activities. One reason for this is the potential for disputes following the increased work carried out during the stamp duty holiday which meant a significant rise in transactions numbers, often against a deadline.
As Lockton comments: “Notably, a greater volume of conveyancing work being undertaken increases the likelihood of more claims materialising. There are also the increased risks that a fixed deadline creates, especially if this results in fee earners rushing work, or worse – such as circumnavigating the risk management steps that you have in place.”
Broker Miller also identifies other areas of rising claims which puts insurers on alert and puts pressure on premiums. Its April 2021 renewal review again highlights IT security with an increasing number of General Data Protection Regulation (GDPR) related claims following minor breaches. There are also concerns about increases with wills noting that “Family structures [have] become more complex so the potential for disputes and challenges arise about potential non-compliance with instructions.”
How to prepare for renewal
Taking all these factors into account means that it has never been more important to be well-prepared for renewal in an effort to minimise any increase your insurer is likely to impose on your premium. Top tips include:
1. Rely on a broker who should be a trusted business advisor with a good understanding of the firm. They can guide you through the renewal process and use their market knowledge to identify the right insurer for you.
2. Ensure your renewal proposal sclearly and concisely present the firm’s structures and finances and demonstrates how you undertake best practice and risk management.
3. As the insurer will carry out due diligence on your proposal and information provided, make sure that there are no discrepancies in your disclosure as a simple internet search or a quick check of Find a Solicitor will quickly ascertain the facts.
4. With the level of detail now being demanded in the renewal process, it is important to give it the right amount of dedicated time. Create a project plan and critical path to know where and when tasks need to be completed. A broker will be able to advise and support you during the process and will understand what details insurers are currently wanting in order to make a decision.
5. Be aware there is an increasing tendency for insurers to ask partners/directors for personal guarantees. If it is raised be sure to gain a full understanding of who is affected, what levels of guarantees are required and in what circumstances they would be called upon.
Remember that lack of evidence of robust systems and protocols is likely to lead to higher premium costs, giving further support to the Lexis-Nexis report that higher PII premiums are the biggest threat to business.
Alleviating the strain on cash flow
With the rise of premiums looking unlikely to reduce any time soon, it is prudent to consider your finances when it comes to renewing your professional indemnity insurance. As one of the largest costs that a firm faces annually, spreading the cost of your premium into manageable monthly instalments could help to support a healthy cash flow. Specialist finance providers provide flexible and reliable finance solutions to legal professionals looking to spread the cost of their PII and other short-term liabilities.
As a strategic partner to the Law Society and its members, Wesleyan Bank has worked closely with legal firms for many years and as such understands the pressure that liabilities such as professional indemnity insurance can have on a firms cash reserves.
Where we act as a Broker, loans are provided by a single lender. In these instances, we receive a commission payment calculated as a percentage of the overall loan value from the lender. This commission payment does not impact the final amount that you pay for borrowing. Depending on the circumstances and where required by law, loans will be regulated by the Financial Conduct Authority and the Consumer Credit Act.