Solicitors’ Professional Indemnity Insurance, Covid-19 and a hard market – a perfect storm!

1 October remains the date when the majority of law firms renew their professional indemnity insurance (PII). We are in challenging times and firms are concerned about the impact that the Covid-19 crisis will have on their premiums and the capacity and appetite of Participating Insurers.

As a specialist broker in this area, Howden is keen to ensure firms know what to expect and plan for. Howden’s overriding message is to start early, this is not the year to leave your PII renewal to the last minute.

We are in a hard market

When Covid-19 lockdown was announced on the evening of March 23, we were just days away from the 1 April renewal for solicitors’ PII. The lockdown was not a barrier to business. Our robust IT systems and strong relationship with the insurers we work with, meant that we were able to operate on a “business as usual” basis, despite the unusual times. The more significant challenge was the increase in PII rates that firms experienced. This was already an issue before the Covid-19 crisis and we had cautioned firms about it in our Market Report published in January 2020. Across the profession, from sole practitioners to Top 100 firms, we are currently in the hardest market for solicitors’ PII since the profession voted to move its insurance arrangements from the SIF to the open market in 2000.

The move towards a hard market began following the Lloyd’s Report published in July 2018, when Lloyd’s identified a need for their syndicates to return PII business to profitability. Company insurance markets have also followed this lead. For solicitors’ PII it was not until the renewal of 1 April 2019 that we saw the first real increases in rate and the trend has continued since then. The increase has impacted both the primary £2m and £3m compulsory cover and excess layer cover.

The position is also impacted by the fact that insurers of solicitors’ PII continue to incur significant losses, particularly in relation to property work with claims arising from the failure of buyer-funded developments being an issue alongside other failed investment schemes. Even the Compensation Fund is creating a £30m contingency fund to deal with claims of this nature and it only deals with a fraction of these matters, on the very rare occasions where there is no cover available under the primary £2m or £3m cover that follows the Minimum Terms and Conditions (MTCs).

Looking ahead to 1 October 2020

Prior to Covid-19, we anticipated that there would be some additional rate increase in October 2020, and firms are now asking whether the fallout from the pandemic will harden the market even further. It is still early days and the answer will depend upon the view that insurers take regarding an increased level of risk. Remote working does bring challenges with regard to issues such as supervision and confidentiality and as deals fall apart clients who have suffered loss will always look for someone to blame. We know that solicitors are always a target and to the extent that there is any increase in claims activity as a consequence of Covid-19, then that will inevitably filter through insurers’ rating models and impact premiums.

It is inevitable that, for most firms, the current crisis is also going to lead to a drop in gross fees, at least for a period. We have been asked whether this will translate into a corresponding reduction in premium. Given insurers apply their rating to the last complete financial year, firms should not plan for any premium relief in the short term and while the hard market continues premiums are unlikely to decrease in any significant way even if there is a projected decline in fees. 

Information for insurers on your response to Covid-19

As we approach the October renewal, PII insurers will undoubtedly begin to focus on risks associated with the response to Covid-19. While some might revise proposal forms to include specific questions, we always encourage firms to include a covering letter or summary to highlight or expand on any issues that are not otherwise covered on the proposal form. For firms that renew on 1 October 2020 this is going to be more important than ever.

Points that firms should consider highlighting are as follows:

Remote working arrangements

Had you planned for a scenario whereby your office would be closed and fee earners were required to work from home? How did those plans work when put to the test? Is your IT sufficiently robust and secure? How is work undertaken remotely supervised and audited? Insurers will want to know the extent to which you have been able to maintain “business as usual”.

Risk management initiatives

Risk management is always important and insurers will be looking for reassurance that procedures were quickly adapted or introduced to meet the additional challenges of remote working.  An overview of any new initiatives you adopted will be of interest to insurers and provide them with a level of comfort. Some of the issues to consider are IT security, maintaining client confidentiality, arrangements to cover the files of fee earners who were furloughed, training and supervision arrangements for fee earners deployed to different parts of the business, document management and procedures for taking will instructions and the execution of wills and other original documents.

Business levels

The impact of Covid-19 on workloads and new business has differed across firms. Some smaller private client firms have reported an upturn in business as a result of an increase in people wanting to complete wills. On the flip side, new instructions have dropped off a cliff for those firms with a significant conveyancing practice. It will be important to update your insurer on the experience of your firm, any reduction or increase in business and how you have managed that from both a practical and financial perspective.

Financial position

Insurers are aware that the cash position is going to be severely affected for many law firms. They are also likely to be concerned about a potential increase in unpaid run-off premium if solvency issues lead to the closure of firms in the wake of the crisis. The risk of financially stressed firms taking on work in areas where they do not have expertise will also be on their radar. It is therefore critical that firms focus on financial management over the coming weeks. You need to know and understand your numbers and be ready to explain your plan to weather the storm.

Future outlook

The future outlook is important. Firms need to revise their budgets…..and be ready to revise again if there is a further lockdown in the coming weeks. If your plans are not realistic, or you don’t have any, then this will be a source of concern to insurers.

5-Point Action plan for 1 October 2020 renewals

If your firm renews their PII on (or before) 1 October, then we urge you to start working on this now. This is not the year to leave it until the last minute. Howden offers the following advice:

• Talk to your broker early to understand what you can expect from your insurer with reference to the profile of your particular firm.
• Agree a timeline with your broker for submission of your proposal form and ensure that you then provide appropriate deadlines to those in the firm who need to provide you with the information that is needed.
• Take time and care with your proposal form and accompanying documentation to ensure it provides the best possible presentation of your firm. Your PII premium represents a significant spend in your budget and justifies the investment of time to complete your submission.
• Review your budget for PII and make adjustments based on advice from your broker
• Consider all available finance options. Given the financial pressure created by Covid-19, we expect that more firms will need to look to finance their premiums for the 1 October renewal. If your firm is under financial pressure this might not be as straight forward as it has been historically. Allow yourself plenty of time to source available options and find the best deal.

For more analysis of the 1 April 2020 renewal look out for the Howden Market Report for Solicitors’ PII to be published in June 2020.