Ryan Senior, senior vice president at Paragon International Insurance Brokers, offers his analysis of the professional indemnity insurance (PII) market, and gives his top tips for your firm.
In 2013, the Solicitors Regulation Authority relaxed its previously mandated Professional Indemnity (PI) common renewal date. Although many firms elected to retain a 1 October renewal anniversary, 1 April has become a popular alternative, meaning that, twice a year, industry commentators have the opportunity to reflect on market conditions.
I can predict headlines bemoaning the challenging market, insurance capacity issues and tighter underwriting criteria, but is this universally accurate or just an easy way to excuse you or your insurance broker’s failure to prepare for your PI renewal? By focussing on the macro-market position, are the fundamentals being ignored?
PI underwriters are supported by a significant claims and actuarial infrastructure that help them frame their general underwriting stance. However, because of the relative complexity of solicitors’ PI, coupled with the breadth of coverage provided by the Minimum Terms and Conditions, insurers do not rely on actuarial algorithms alone. The underwriter will individually scrutinise each applicant. It is, therefore, imperative that you and your broker fully and effectively engage with underwriters at all stages during the negotiation process. Failure to do so will almost certainly compromise your insurance terms, and in our experience, this failure will probably outweigh the influence of any general insurance market trends.
So, given the three parties engaged in the renewal dialogue; the firm, its broker and the underwriter, it’s helpful to examine some aspects of their respective roles and sensitivities.
1. The firm
It should be self-evident that the firm’s engagement in the application process is pivotal to insurance negotiations’ success. Gone are the days (if they ever really existed) where a scribbled proposal form submitted a few days before the renewal would suffice. Your renewal presentation should, of course, contain a legible and accurately completed proposal. Still, underwriters need to feel assured that the firm has key risk factors under control, especially in matters relating to your claims history. This is likely to require additional evidence. Your claims experience, lessons learned and remedial action are important features that will influence both the rating algorithms and underwriter’s judgement.
It’s unlikely that your firm is loss-free over the period of review selected by the insurer (usually between five and ten years). You should regularly review your losses to develop appropriate risk management strategies and ensure that any documented claims payments and reserve records accurately reflect the actual position. With all claims, regardless of their size or frequency, underwriters will need assurance that root causes have been identified and robust controls put in place to mitigate future occurrences.
There are three significant claims features that I’d like to highlight.
Open claims that should be closed
PI claims tend to increase in value from the time they are notified until finally settled; the ultimate loss. This, for example, can be a consequence of the build-up of defence costs and/or delay in establishing the actual value of the claim. Insurers will use claims development tools known as triangulations to estimate your ultimate losses. Triangulation, which applies a weighting depending on the claim’s age, will be applied to all open claims. On the basis that closed claims are rarely re-opened, these claims should not be subjected to triangulation. To ensure that finalised/closed claims matters are not included in the triangulation pot, thereby artificially increasing the calculated premium, you must ensure they are correctly documented as closed.
Large, one-off claims
No claim is a good claim, but larger losses are the easiest to deal with when engaging with underwriters. Larger losses are usually well documented, and the firm’s risk control response will be focussed and easily communicated to the underwriter. To further reduce the impact of large losses on individual firms, some insurers cap losses in their rating matrices, preferring to reserve a notional “large loss” fund across all policyholders.
Small, systemic claims
High volume, attritional losses are a challenge to deal with when preparing for renewal; this type of loss hurts insurers most. If your firm has sustained high volumes of claims, even if the monetary value is relatively low, it is essential that you start to engage with underwriters early as they are likely to initiate a risk management audit which, of course, will take some time to complete.
2. The underwriter
The underwriter’s role is that of a gatekeeper, reviewing every aspect of the firm’s operation to ensure the applicant meets the insurer’s acceptable commercial and risk profile. A significant profiling feature that needs to be evaluated before renewal or new applications begin is whether the firm’s work types fit the insurer’s preferred profile, particularly where some insurers are sensitive to the proportion of certain work types that the firm performs. A good example of this is conveyancing.
Generally speaking, we tend to see work type splits remain relatively stable with fee growth across the board, but this is not always the case, and there can be spikes. In practice, this can be particularly problematic for the firm if conveyancing fees have disproportionately increased.
Underwriters are more likely to accept fee spikes if they feel the firm has effectively addressed current risk issues, such as:
- Have you advised your clients that the firm might not be able to complete the conveyancing transaction before the end/changes to the current SDLT holiday?
- With property development work, especially buyer funded developments where some completion failures have occurred, can you demonstrate that you have effectively managed the risks involved?
3. The broker
Although we encourage firms to actively assist in the preparation to open dialogue with insurers, to a significant extent, the firm’s relationship with underwriters will be vicarious, with your broker taking the lead. In choosing your broker, we recommend that you consider two important issues.
Brokers asking for permission to access the whole market
For larger firms, say with 10 or more partners, it’s necessary to canvas a broad section, if not all, of the Participating Insurer market, especially if the PI policy is split between multiple insurers. However, for smaller firms, this can be counter-productive; brokers who ask firms to give such an authority potentially run the risk of undoing the progress that others have made. Specialist PI brokers tend to have established and sometimes exclusive deals with insurers. Controlling broker authorities to avoid over-broking, market saturation and, quite frankly, underwriter fatigue is very important. So, please ensure your broker actively advocates limited market authority.
Brokers who are wholesalers or retailers
Brokers that do not have a commercial relationship with one or more Participating Insurers will be forced to sub-broke through one that does. The practice of retail broking often comes about because of their geographical proximity to the firm and local contacts. It can benefit the insurance placing process, but you must be aware of the risk that using multiple brokers can dilute the engagement process advocated in this article and add costs. It’s essential that you understand the broker’s status and address any potential downside of having multiple links in the broker chain.
This overview is far from exhaustive. In this series’ next article, we’ll dive deeper into preparing your firm for the renewal/new application process. I use the expression “process” deliberately as there is, or should be, a systematic approach to the application, starting with evaluating your loss experience, business plan, risk/operational controls and, of course, preparation of your proposal form and supporting documents. In compiling and documenting your firm’s profile, the most appropriate insurer for your firm can be identified, and dialogue with the underwriter initiated with confidence.
Underwriters tend to adopt a long-term view. As such, we have developed tools to average and contextualise fee income over periods of time that are in tune with individual underwriter’s rating horizon. As this varies from insurer to insurer, we’d be happy to share our methodology on a case-by-case basis.
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