When firms had to renew their insurance, many were struck by how much the process had been impacted by the disruption of Covid-19. On top of the complex negotiations and increased information required, around three quarters found that premiums had risen on average 15% with firms with turnovers of £50-£100 million seeing increases of around 40%. Why did rates increase so drastically? Should firms brace themselves for further premium increases? And is there anything they should be doing now to secure lower rates ahead of the April 2021 renewal period? We spoke to Martin MacHale at specialist professional liability broker, Paragon Brokers, to find out.
What is professional indemnity insurance (PII) and why is it important to law firms?
Most simply put, PII is protection provided to your practice in the event that claims are made by former or current clients arising from the legal services you provided. These allegations might include negligence, breach of trust or defamation.
nterestingly, unlike most forms of insurance, the policy is there to protect the claimant and ensure their claims (where justified) can be paid. This is the reason why firms are obligated by the SRA to purchase PII.
How are PII rates calculated?
Each insurer will have a slightly different method to calculating rates and insurance premiums. That said, broadly speaking, there are four main factors that will influence an underwriter’s rating model:
- Number of partners
- Types of legal work undertaken
- Claims history
Other factors include the number of offices and the ratio of managers to staff. It is important to remember that each insurer will have different ‘underwriting appetite’, meaning they may offer preferential terms depending on the work you undertake and if it aligns with their underwriting model.
Many firms saw an increase in PII rates this year. Why is this?
In recent years the premiums charged by underwriters have not been sufficient to pay for the claims that insurers have had to settle – the frequency and severity of claims continues to remain high.
The SRA continues to set the Minimum Terms and Conditions (MTC) for insurance. This means underwriters have no ability to alter policy wording and therefore control their potential claims exposure. This has resulted in a ‘price driven / orientated’ product.
The continued payment of claims versus the low premiums has resulted in several insurers withdrawing from the market. Rates are now undergoing a self-correction after 10 years of artificially low premiums which has led to increases and the general ‘hardening’ of the insurance market that law firms are experiencing this year.
Once PII in the legal sector is more profitable again, other insurers will be attracted to (re)-enter the market and a new cycle of stronger competition and lower premiums will begin.
How has Covid-19 impacted the PII market?
As explained, premiums were already undergoing a correction before Covid-19. Rather than directly affecting the pricing of premiums, it has reduced the appetites of insurers to underwrite a large volume of legal sector business. This is more likely to affect the PII market indirectly.
Given the widespread fear of a major and long-lasting recession, and the historical fact that claims activity in the legal sector tends to increase in recessionary times (and for a little while after), insurers can be expected to be careful to limit their exposure. These harder market conditions may last for a longer period than the legal sector has been used to in the past.
The most obvious impact of Covid-19 has been the marked increase in the amount of information requested by the insurers, including Business Resilience Questionnaires, Excess of Loss proposal forms, and firms’ Reports and Accounts.
These concerns will likely extend to how firms have addressed the remote working environment over the last 10 months, particularly from a supervision and IT perspective. Ensure you explain this in detail and consider purchasing a standalone Cyber policy if you do not already have one.
There are also the issues of insurers’ obligations to firms that have solvency problems; specifically, around run off premium debt. Whilst a number of Participating insurers are speaking to the SRA about their obligations no changes have yet been made and it is something insurers will consider in their underwriting.
What happens if a firm fails to get covered by the deadline?
If a firm’s insurer does not offer renewal terms and they are unable to find alternative cover from another participating insurer they will move into the Extended Policy Period (EPP). This is a 90-day period broken into two sections.
During the first 30 days the firm may continue business as usual while continuing to engage insurers. If after the 30 days the firm has not found alternative cover, they will then move into the ‘cessation period’, lasting for 60 days, in which they must bring the business to an orderly close. During these 60 days the firm may not take on new clients.
Can law firms take any steps to reduce their rates?
In the current market it is very unlikely that any law firms will receive a reduction in their premium rates. That said, there are certainly steps a firm can take to help control the increases and become a preferred risk.
The key is to make underwriters comfortable with your firm and its procedures. This is done through a timely and detailed submission. Engage your broker early, understand what the underwriters’ concerns are and what information they require.
How can law firms best prepare for April 2021 renewals?
Again, start the renewal process early – do not wait until March! You should plan to be speaking to your broker before years’ end; discuss the market, what documents you will need and come up with a renewal timeline.
The key to 2021 renewals will be information! It is your brokers job to prepare a relevant and effective renewal presentation to ‘sell’ your firm to insurers as a risk that they want to write. However, to do this effectively they need the necessary information. Inundate your broker with information!
By now you may well be sick of hearing that ‘the market is hardening’! However, the reason you keep hearing this is because it is true. It is important to understand what is happening, why we find ourselves in this situation and to have realistic expectations regarding renewal.
In particular, if you are a specialist firm or undertake ‘contentious work types’ like conveyancing, speak to a specialist broker! Understand the exclusive facilities that are available (which your current broker might not have access to) and how these underwriters might be positioned to offer the best cover for your firm in this unusual market.
Paragon is a specialist insurance broker, operating in the Lloyd’s of London, Bermuda, European and International Specialty markets. For more information, contact Paragon on 0207 280 8209 or via email at [email protected].
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