Update on the London PI market this renewal season

What can Australian law firms expect from the London PI market this renewal season?

Howden’s Law Firm PI team in London have just released their bi-annual Market Report reflecting on the outcomes of this 1 October 2021 renewal season. Given that many insurers involved in that UK renewal season also participate on the PI programs of Australian law firms, this bi-annual report provides an interesting preview of what might lie ahead in the lead-up to 30 June 2022.

While the vast majority of Australian law firms have their Professional Indemnity (PI) insurance falling due for renewal annually on 30 June to coincide with the renewal dates of their compulsory primary policies, 1 October is a peak renewal date in the United Kingdom with 49% of Howden’s law firm clients in the UK renewing at that time. This provides an interesting preview of what might lie ahead in the London market in the lead-up to 30 June 2022 for Australian law firms.

In this paper we provide an overview of the key findings contained in the report with a focus on relevant items for Australian firms in advance of their 30 June 2022 policy renewals.

General overview

The hard market conditions which have been evident for the last two years continued, with insurers applying the same robust underwriting approach to policy renewals. 

There were more questions asked and greater scrutiny by underwriters, resulting in prolonged renewal processes. 

Underwriters continued to be nervous about both the current level of claims activity and what might be on the horizon as the economy moves on from the pandemic. There was also a significant focus on cyber-related issues which we believe to be the result of an increase in claims with a cyber-related connection. 

Premiums

While any general observation about movement in premium rates is difficult given the different dynamics connected to each insureds’ insurance program and risk profile, our analysis of the 1 October UK renewals shows that premium increases were evident across firms of all sizes, with many firms experiencing double-digit premium rate increases again at 1 October 2021 following similar increases at their prior renewal.

The increase was not confined to any particular sector of the profession or size of firm, although those firms that engage in conveyancing and property work generally experienced a greater increase in rate.

We would also highlight that when insurers increase their rates it means that firms will pay more PI premium for every $1 of gross fees. If a firm’s gross fees have also increased, then there is a double-hit because they are paying both a higher rate, and paying it on more fees. 

Our analysis also showed that premiums on mid to high excess layers of programs saw more significant proportional premium rate increases. This reflects the fact that:

1. Excess layer premiums were historically more modestly priced, so achieving any material and meaningful increase in actual premium has required a higher rate increase; and
2. Secondly, we are continuing to see more claims that exceed the lower layers of programs (including for Australian firms their compulsory primary limits).

Insurer appetite and capacity

Lack of appetite for new business amongst insurers continued. While insurers were willing to offer terms to existing clients (absent any issues of concern such as problematic claims), they had limited appetite for taking on new clients and only did so after careful scrutiny and satisfying themselves that the firm was a suitable risk. This was demonstrated by data which showed that only 6% of Howden clients moved their primary insurer at renewal in October 2021. This is approximately half the trend going back to 2017.

Capacity and appetite issues also existed in the higher excess layer market. As noted above, given the recent claims experience and the concern about future exposure, there were fewer insurers who were willing to write this business. Many excess layer insurers were also quite restricted with the capacity that they were prepared to offer. 

What lies ahead?

When forecasting what lies ahead for 2022, it is useful to start by talking about capacity. We consider new capacity coming into the solicitors’ PI market will be key to moving the cycle forward, stabilising rates and potentially leading us towards a “softer” market.

We have not seen any new insurers enter the solicitors’ PI market for some time now, despite the ongoing increase in premiums. History tells insurers that when the economy falters, and particularly when the property market dips, then claims against solicitors increase. There is still a level of uncertainty whether legitimate or not, about what the position will be as we move through the pandemic.

There will be a point at which the level of premiums and comfort about the wider economic environment combine to encourage new entrants to the market. It is only a matter of time before this happens and Howden is working very hard to encourage new capacity. This is also the point at which insurers are likely to have more appetite to write new business.

Where to focus your attention

It is always an advantage to know the risk issues on your insurers’ radar at renewal. This changes over time and can be driven by a range of factors including recent claims activity, concern about emerging risks, regulatory issues, or the general economic environment and its potential impact on the profession.

At Howden we are always keen to highlight issues that are under the spotlight, so that our clients have an opportunity to consider what work they might need to do in advance of renewal to “get their house in order”. 

Below are what we currently consider to be some key areas for firms to consider in advance of their 30 June 2022 policy renewal.

1.  Property-related work

The profession is accustomed to insurers complaining about the level of claims generated by conveyancing and other property-related work. Claims arising from failed buyer-funded developments and other property investment schemes have been a particular problem over the last 2 to 3 years. 

2.  Anti-Money Laundering (AML)

The failure of firms to deal appropriately with AML issues has featured repeatedly in the UK legal press. Underwriters are aware that there are a number of law firms where there are shortcomings in compliance. As a result, underwriters see this as a wider risk issue outside of the UK. Are you sure that your firm is on top of this?

3.  Cyber security

Remote working has increased the perceived risk of claims arising as a result of cyber security issues. 

Are your systems secure? Do you use multi-factor authentication (MFA)? Many cyber insurers insist on this as a minimum requirement before they will offer a separate cyber policy. Do you have a separate cyber policy? This is a question that some PI insurers are now asking. Most separate cyber policies provide cover for the remediation of IT systems in the event of a cyber-attack. This will assist your firm to be up and running as quickly as possible if something goes wrong. 

4.  Risk management initiatives

In the current hard market firms should turn up the volume on risk management across all areas of the practice. At each renewal you want to be able to point to changes made or new risk management initiatives introduced to the firm.

Your firm will undoubtedly have policies for supervision and file reviews – but are those activities happening across the entire firm? Are you undertaking sufficient training? More importantly, is that useful training or are people just ticking the box?

Should you be considering any new systems or technology that would streamline processes and help to eliminate risk?
When did you last review the template for your firm’s engagement letter? Is the scope of the retainer being properly drafted by fee earners? Underwriters will be comforted to hear that you undertake regular reviews in this area.

Document any changes that you make and bring them to the attention of your underwriter at renewal, in either a covering letter or supplementary document.

5.  Wellbeing

PI underwriters are also becoming increasingly conscious of the connection between the mental health and wellbeing of fee earners and risk. While a claim might present as something such as a missed time limit, the underlying cause can be stress and pressure on a fee earner who is not coping with their current workload.

Firms should challenge themselves on whether they are taking this issue seriously. You might have policies and procedures in place and consider that you have an “open door” and caring culture, but is that evident across the entirety of the firm? What do your fee earners say about the issue? Do they feel genuinely supported?

Conclusion

While the 30 June 2020 Australian law firm renewal season will undoubtedly develop its own issues and trends, the lessons from this peak 1 October 2021 UK renewal date serve as helpful insight into what might lie ahead. 

Fundamental items such as adhering to a properly considered renewal timetable, advocating your unique profile, addressing items of concern for insurers, engaging early with insurers and considering your required limit of indemnity all remain critical steps for firms to address with their broker.