Law Firms PII Renewal on 1 October 2020: An Overview
If we were asked to sum up the 1 October renewal for solicitors' PII in one word, it would be "challenging".
It was undoubtedly the most complex renewal since solicitors moved their insurance arrangements to the open market in 2000. It required considerable skill, planning and innovative thinking to successfully navigate through negotiations and achieve the best result.
The factors that combined together to create the current difficulties were:
- Ongoing pressure on insurers to increase rates as an outcome of various reviews that identified PII as a poor performing class of business.(with solicitors PII being one of the highest loss making professions)
- Significant losses in terms of quantum and frequency arising from solicitors’ involvement in failed buyer funded developments and other investment schemes.
- A significant increase in the number of multi-million pound claims hitting insurers from larger law firms.
- A general sensitivity to the potential for additional losses arising from activities performed during Covid-19 lockdowns and the resulting downturn in the economy, including a possible fall in the property market. Claims against professionals always increase during a recession.
- Concern at the potential for significant “law firm failure” within the SME sector with firms unable to pay the premium for the 6 years run-off cover insurers are obligated to provide.
As a consequence we have seen:
- Insurers demanding far more information (both in quantity and detail) than in previous years.
- Turnaround times from insurers are slower than previously (due to increased information and current remote working conditions).
- The Insurers desire to significantly increase rates.
- Insurers reducing their participation to manage their exposure.
- More time being required to finalise placements with potential increases in premiums from following Insurers (“tail wagging the dog”).
- A reduction in overall capacity to underwrite PII.
Longer, slower process and more forms to complete
Over the years the profession has regularly expressed their dismay at the level of paperwork that is required to renew their PII – both in terms of the length of the proposal form and, in some instances, the need to complete more than one form. For renewals falling due on 1 October 2020 the amount of information required reached a new level altogether.
Insurers introduced new questions regarding each firm’s response to the pandemic and associated lockdown and its financial position and outlook. Excess layer insurers had introduced their own proposal forms for the 1 April 2020 renewal and this continued for October. Premium Finance providers also required considerably more information and introduced their own additional questions.
For those firms that renew in early 2021 we would urge you to start the process now. We do not expect the level of information required to reduce in the short to medium term.
Increases in premium and self-insured excess
In our Market Report published in January 2020, we forecasted the market hardening with likely premium increases for both the April and October renewals. In August, the Law Society likewise warned firms to expect increases and suggested “firms should brace themselves for average rate increases of 30%, but those with poor claims histories should expect far higher increases”. ().
This warning did not overstate the seriousness of the situation. Our analysis confirms that while many firms achieved renewal with a rate increase below the 30% suggested, for some it was higher. The nature of the work undertaken by a firm, along with any associated claims history were significant drivers of rate. Every firm is different and their premium and rate increase will always be driven by their profile including areas of practice, claims history, size, risk management approach, the nature of their client base and their disciplinary record.
Some insurers were also looking for an increase in the self-insured excess. In some instances a removal of the aggregate cap was also applied or referenced to certain work or claim types. A number of large firms have looked to us for guidance on the establishment of a captive solution for their self-insured exposures. This is a trend we expect to continue in 2021.
Excess layer cover (sometimes referred to as top-up cover) was also more expensive this year with rate increases of over 50% in many instances.
Appetite and capacity
Unlike previous years, insurers were not clamouring for new business this year. For example one significant and long-term player in the solicitors’ PII market, was not interested in writing any new business and also reduced their capacity to 50% for all firms of 11 partners or above. Others set out very restrictive criteria for new business, with most putting a limit on the percentage of fees derived from certain higher risk work. For example, many set their upper limit for conveyancing fees to less than 20% of gross fee income.
Some primary layer insurers also reduced the limit of indemnity that they were prepared to offer. Whereas historically they might have offered limits up to £5m or £10m, this year they often looked to control their exposure by reducing to the minimum £2m or £3m required by the MTCs.
There were no new entrants looking to acquire a share of the market either. In our view, this again demonstrates that insurers are concerned about the potential for adverse claims activity in the wake of Covid-19 and do not consider this to be a good time to enter the solicitors’ PII market, despite the high premiums. It remains to be seen whether any reflect further on this and change their view going into next year given the extent of the rate increase achieved by many insurers for 1 October 2020.
Limitations on capacity and appetite made it difficult for some firms to obtain alternative quotes to compare against the renewal terms offered by their existing insurer. However with professional planning and project management around strategy, many law firms have been able to challenge their existing arrangements.
18-month policy periods
Despite rate increases, law firms were generally still interested in 18-month options, but most insurers refused to offer them. On the Howden book, 17% of firms renewing on 1 October 2020 had been on an 18-month policy, but only 1% subsequently renewed on this basis. For now at least, it seems that 18-month deals are largely a thing of the past.
Financial scrutiny and personal guarantees
Insurers are particularly concerned at the prospect of firms failing in the coming months as a result of the financial pressure caused by the pandemic. When a law firm is forced to close without a successor practice, the requirement for their insurer to provide run-off cover for a period of 6 years is triggered. The insurer is obliged to provide the cover, whether or not the firm is able to pay for it. In addition, the insurer is obliged to pay the excess to a claimant in the event that an insured firm fails to do so and the excess remains unpaid for more than 30 days.
Insurers tried to persuade the SRA to change the rules prior to 1 October 2020 to remove the obligation to pay any outstanding excess and make run-off cover subject to payment of the premium. The SRA were not prepared to do this. The following note is from the report of the Chief Executive to the SRA Board for their meeting of 15 September 2020:
“We have engaged with insurers, committing to work with them to make sure our operational processes minimise the risk of non-payment. However, we have indicated that we will not amend our PII requirements at this stage and without evidence that to do so would be in the consumer interest.”
As a result, insurers were scrutinising the finances of individual law firms more closely than we have experienced historically. Two insurers imposed a requirement for principals of many small to medium sized LLPs or other incorporated practices to provide personal guarantees. Understandably this was an unwelcome requirement from the perspective of the principals concerned. Some of those who found themselves in this situation preferred to accept a higher quote from an alternative insurer to avoid the potential for personal exposure and this proved to be a significant driver for moving insurers. However, for those who were unable to get acceptable alternative terms, the stark choice was to either agree the personal guarantee or close the firm.
Forecasting ahead of 1 April 2021
We appreciate that the above commentary is likely to be of concern to those firms who will renew their PII over the coming months. Although news is emerging of an effective vaccine it is prudent to plan for Covid-19 to remain as an issue for the short to medium term. There remains the potential for further lockdowns and the consequent impact on the economy.
In September 2020 the chair of the Law Society PII committee went as far as suggesting that financially challenged firms consider closing their practice rather than renewing their PII. () The rationale for closure was that the run-off costs would have been less than after renewal, given that they are always based on a multiplier of the expiring premium.
The best advice is that firms ensure they stay informed and engage with a specialist broker that has strong relationships in the PII market. Howden is a specialist PII broker and have a team dedicated to the legal sector. The team is one of the largest in the UK, managing insurance on behalf of a broad range of over 1500 legal practices, from sole practitioners through to the UK’s top 20 law firms. Indeed, our specialist Legal Services Practice Group provides leading insurance and risk management solutions for firms within The Lawyer UK 200 and are the fastest growing broker in this sector - winning Broker of the Year 2020 at the insurance insider awards.
We will be publishing our next bi-annual Market Report in early January 2021. In that edition there will be a more detailed analysis of the October renewal and the market, including our forecast of what to expect in 2021.
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