The professional indemnity (PI) insurance market is changing. Martin MacHale from Paragon International Insurance Brokers summarises key trends in the latest batch of renewals and what law firms can expect in the year ahead, including a new focus on cybersecurity measures.
The recent passing of the common renewal date on 1 October 2019, which sees 80% of the 9,500 law firms in England and Wales renewing their professional liability cover, once again highlighted the significant material changes that the market is going through at the moment.
Now that the dust has settled, we have a clearer picture of how insurance premiums were affected, why this happened and what to expect in the immediate future. This article looks at these trends in more detail and provides guidance to firms on how to prepare for your next renewal.
What we saw
Reduction in capacity
The fact that the professional liability insurance market has lost a number of insurers over the past 12 months is not news. From a purely commercial perspective, this meant there were fewer insurers competing to retain and win the same number of law firms. Less insurer capacity meant underwriters were afforded the chance to be more selective and thorough than they have been over the last 10 years. So, the remaining insurers were able to delve into much greater detail, asking firms more penetrating questions.
Naturally, this raises the question of why this class of business was not scrutinised in such detail in previous years? The answer is simple, if insurers were deemed to be too probing, firms could simply ‘walk across’ to a competitor and find competitive cover elsewhere.
This is no longer the case. Increased enquiries and analysis into underwriters’ books by industry regulators, and their own management teams, mean that underwriters need to back up every commercial decision with facts and figures in black and white.
Increase in premium rates
Since 1 October 2018, law firms have seen the premium rates increase between 10% and 30%. Lloyd’s of London’s thematic review last year resulted in a long-overdue intervention. Insurers were required to submit business plans on how they would write business profitably, or have their authority withdrawn. The Solicitors Regulation Authority’s (SRA) minimum terms and conditions mean that the scope to alter cover is limited. For insurers wishing to continue to write this business, the only option was to increase rates.
If your firm was subject to these increases, it is important to understand it is not a reflection on your practice
Premium-rate increases are not new to solicitors. However, in 2019 – for the first time – there were no new entrants to the market who could quote dramatically below the insurer average, as was the case in 2018. Such insurers have since been forced to withdraw (due to massive losses and premium pots being wiped out in under a year), leaving law firms searching for cover.
For firms buying the minimum level of indemnity (from £2m to £3m, depending on a firm’s status), average rates increased by 15%. However, firms buying ‘top-up cover’ in excess of the primary layers saw rate increases ranging from 20% to 30%. If your firm was subject to these increases, it is important to understand it is not a reflection on your practice. Years of artificially low premiums have left the market exposed to self-correction for some time and this is what we are now seeing.
Lack of cover
Fortunately, for the first time in many years, firms seemed more aware of this shift in the insurance market. Historically, September has been the busiest month in the approach to 1 October. This year, renewal packs with request for terms were coming in as early as June.
This meant that insurers were able to give indications and, in many cases, cover (subject to no new claims) far earlier than in previous years. This proactive approach from law firms, combined with the reduction of active underwriters, actually led to a number of insurers running out of capacity before 1 October.
More firms than ever found themselves entering the Extended Insurance Period (EIP), unable to find cover from a qualifying insurer. While there are always a few firms that find themselves in this situation, in 2019 the number rose dramatically. This again highlights the increasingly selective nature of underwriters.
Cross cover claims
Law firms’ exposure to cybercrime is not new. However, the number of cyber claims being presented to insurers, in the hope that the PI policy will cover the loss, is rising. This is a growing trend and firms who continue to believe they are immune to cybercrime may begin to prejudice themselves.
A few insurers have already introduced new subjectivities stating that PI cover will not be valid unless firms also have a stand-alone cybercrime policy.
What to expect in 2020
Unfortunately, the reduction of underwriting capacity is expected to continue. In the last month, three more syndicates who were very active in the professional liability class have closed, potentially with more to follow. This will lead to further reductions in capacity and potential increases in premium rates.
Fortunately, the worst of the uplifts should now have passed. While it is expected that there will be a premium increase for firms renewing on 1 April 2020 and in October 2020, these increases should not be as dramatic as those of October 2019.
In line with the reduction of competing insurers, underwriters will continue to ask in-depth renewal questions. While the proposal forms are unlikely to change, expect insurers to request thorough additional information.
The increase in cyberattacks is a hot topic on all media platforms, at a time when insurers are becoming increasingly risk-averse
It is likely that there will also be an increase in co-insurance, particularly for the primary-layer insurers. Historically, insurers have written risk at 100% for the primary limits of £2m to £3m. However, as insurers are required to reduce their exposure, it is likely they will partner up to share the risk. Obviously, this will reduce their earnings, but it will also minimise their losses amid Brexit uncertainty and the lead-up to a potential economic downturn (which has previously meant an increase in claims). The days of insurers writing £10m primary layers have come to an end, at least for the foreseeable future.
Expect to see stand-alone cyber policies becoming a standard requirement in addition to PI insurance. The timing in this respect has been unfortunate; the increase in cyberattacks is a hot topic on all media platforms, at a time when insurers are becoming increasingly risk-averse. Again, this has already been introduced by some insurers and is more likely to gather momentum as a standard requirement than fizzle out.
Approaching the changing market
However, it is not all doom and gloom. There are a number of steps that law firms can take to avoid extra costs and reduce individual exposure.
Pre-empt underwriters’ requests for more in-depth answers. Do not view these as a sign of distrust or unnecessary scrutiny. In many cases, law firms who have embraced these reviews have benefitted as a result. Look at risk management questionnaires as an opportunity to evaluate how your firm approaches and manages its risk.
Lean on your broker and ask it what additional information might be required by underwriters. Engage in the renewal process early, providing a thorough renewal pack with in-depth additional information. Providing this information before an underwriter asks for it will never hinder your firm. It may take more time but it will dramatically improve your chances of getting a competitive quote from a stable insurer.
If you have had claims, do not simply send a claim sheet showing the quantum. Give the background to the claim but, most importantly, explain the measures your firm has introduced to ensure this sort of loss does not happen again. Having notifications or claims is not always a negative. It can actually prove to an insurer how your firm has developed as a result.
If your firm undertakes work that an underwriter sees as ‘contentious’, such as personal injury or conveyancing, explain how you manage risk. Provide a narrative detailing the systems and checks in place which ensure dates are not missed and clients are kept informed of potential escalating ground rents. Remember, insurers see applications from hundreds of firms during each renewal period. Help yours to stand out by going beyond the detail in the proposal from.
- More is more
In your form, give more detailed information than the underwriter asks for and help them understand your firm.
- Engage with your broker early
Your broker is there 365 days a year, not just in the month before renewal. Use them as much as you feel you need to.
- Understand the market
The last 12 to 18 months have seen major changes in the professional liability market. Now is the time to canvas the market and benchmark your premium. Keep your broker and your insurers on their toes!
If you have any questions, on stand-alone cybersecurity cover specifically for law firms or anything else, please feel free to get in touch.
Paragon is the Law Management Section supporter.