Solicitors’ Professional Indemnity Insurance: April 2021 Renewal Update
Renewing professional indemnity insurance (PII) has been more challenging for law firms in recent times.
At Howden, just under one third of our SRA-regulated law firm clients have PII policies that fall due for renewal on 1 April 2021. As expected, the hard market for solicitors’ PII continued and most firms saw further premium increases on both their primary and excess layer policies.
Our next Market Report will be published in early July and will provide a more in depth analysis of the April 2021 renewal, but in the meantime we share this overview.
Compulsory £2m – £3m cover
Most firms renewing on 1 April 2021 saw further increases in the annual premium for their primary £2m or £3m cover. As always, the level of that increase was dictated by the unique characteristics of each firm. Those firms with paid or reserved claims or disciplinary activity saw higher increases than those firms without.
The nature and extent of a firm’s conveyancing practice, both past and present, was another significant influencing factor. Insurers continue to incur significant losses from property and investment-related claims and are also concerned about future claims activity in this work area. The Stamp Duty Land Tax (SDLT) holiday is one of the issues on their radar. There is a concern about the potential for mistakes as solicitors struggle with high transaction volumes, and claims by disappointed clients who miss the 30 June holiday deadline and then pick through the file to identify any delay by their solicitor that will justify a claim. The potential for a drop in property values over the coming months as the country recovers from the pandemic is a further consideration for insurers, as experience tells us that claims against solicitors increase when the property market falters. We expect that these issues will continue to be of concern to insurers in the coming months and those firms that have yet to renew should be ready to explain what they have done, and will continue to do, to mitigate these risks.
In addition to increasing premiums, some insurers also sought to control or reduce exposure on their renewal books by adopting one or more of the following measures in certain cases:
- reducing primary limits to the compulsory £2m or £3m on cases where they had previously provided higher primary limits,
- reducing their participation to 50% with the result that those firms needed to engage with another insurer for the remaining 50% of cover,
- increasing the self-insured excess or requiring a higher and/or unaggregated excess for certain work or claim types.
We have reported previously on the enhanced level of scrutiny that insurers providing the compulsory PII cover are applying to the financial position of law firms. This continued for the 1 April 2021 renewal and some insurers requested Personal Guarantees from members of LLPs or other incorporated practices in relation to their potential run-off obligations. We saw this for the first time in October 2020. While some firms looked to move insurers when this occurred, this was not always possible given the lack of appetite for new business.
The good news is that no insurers have left the solicitors’ PII market, but their appetite for offering cover to any firms looking to change insurers was even more limited than it was at the 1 October 2020 renewal. Once again, conveyancing work and claims activity were the most significant barriers for firms looking to move, with many insurers continuing to restrict the amount of conveyancing work as a percentage of gross fees that they were prepared to consider.
Although no insurers have left the market, there has been no new capacity entering the solicitors’ primary PII market in recent months, despite the ongoing increase in premiums. We believe that prospective new players continue to be concerned about the risks and uncertainty associated with solicitors’ PII. This is an issue that we are continuing to monitor, as we expect it will change at some point. You can rest assured that Howden are using their best efforts to look for new capacity and this could be the catalyst for ending, or at least stabilising, the current hard market.
Historically, premiums in the excess layer market were very competitive. Unfortunately there has been an increase in the incidence of high-value claims hitting these layers and some insurers have incurred losses that have prompted them to remove their capacity from this area of the market altogether. This reduction in capacity, combined with rate increases required to return excess layer business to profitability, have inevitably led to the premium increases firms have experienced over the last two years.
Premiums increased further for those firms renewing on 1 April 2021, albeit the level of increase was lower than what we saw in 2020. There also continues to be a capacity issue and there are few options available in the market.
Given the premium increases, a number of law firms are reflecting on whether they need the level of excess layer cover that they have taken previously. Reducing the limit of indemnity is one way to control premium spend, however we urge caution on this. Firms must ensure they comply with clause 3.1 of the SRA Indemnity Insurance Rules that requires them to have
adequate and appropriate cover in respect of current or past practice taking into account any alternative arrangements the [firm] or its clients may make”.
In early May we will be publishing an article in our online publication, Premium Matters, that discusses this regulatory requirement and the issues that need to be considered in more detail. We recommend this as important reading for all those who are involved in making decisions regarding the limit of indemnity to purchase.
Since the pandemic began we have seen a higher level of scrutiny being applied to applications for premium finance and this continued for the April 2021 renewal. This inevitably means that it takes longer for finance to be approved. We continue to emphasise the need for caution in relation to timing. It is important that either the premium has been paid or finance arrangements are settled and in place by the renewal date. This will help to avoid any difficulties or delays with getting insurers to confirm cover for the new policy period.
For those firms that have not secured cover in time, there is the back-stop of the Extended Policy Period (“EPP”) which requires a firm’s current insurer to continue to provide cover for an additional period of up to 90 days. But there are risks and disadvantages with this backstop and it should only be used as a last resort.
We recommend both forward planning and early engagement with regard to finance arrangements well ahead of your next renewal date.
‘Silent cyber’ is an issue that is currently receiving attention in the insurance market and this includes the solicitors’ PII market. The term refers to the scenario where cyber cover is neither explicitly excluded nor clearly included in the policy wording. This can result in ambiguous cover and an increased risk of disputes. The Prudential Regulatory Authority and Lloyds’ have required insurers to put plans into action to reduce ‘silent’ exposures - by either excluding them, or providing affirmative cover.
There was no change to the SRA’s Minimum Terms and Conditions (MTCs) for the April 2021 renewal of compulsory (primary) cover, but an endorsement was usually added to excess layer policies. While we provided information and explanations to all clients affected, we are conscious that this is a new development and we encourage firms to engage with us further if more information or explanation is needed.
The SRA has now published a consultation on the issue (available here) and they are proposing to amend the MTCs in time for the 1 October 2021 renewal. While their proposed amendment permits an exclusion in relation to certain cyber exposures, their stated intention is that this should not apply to third party losses and that accordingly there should be no change in the existing scope of cover under the MTCs. At Howden we are currently reviewing the detail of the proposed wording and will be responding to the SRA with our views as to whether their stated intention is achieved. It will also be interesting to see how both primary and excess layer insurers react to the SRA’s stance and we will be publishing further updates on this issue as the matter progresses.
Will the market be any different in October 2021?
At this point, we consider it is likely that firms renewing in October will continue to see an increase in their premium for both primary and excess layers with insurers’ appetite for new business remaining subdued. As always, it is difficult to predict what the level of the increase will be, but we will be arguing on behalf of our clients that any rate increase applied at previous renewals should be enough to satisfy insurer requirements. The overall rate increase that each insurer is looking for varies. Increases are also dependent upon the application of different rating models and individual underwriter discretion being applied to the broad range of information provided by each firm.
We will continue to provide updates on any developments that might change the current view and it is important that all firms remain informed.
If your renewal date is 1 October 2021, what should you be doing now?
In the first instance we encourage firms to undertake a risk review and address any areas where problems have arisen or work is needed. This will assist you to demonstrate to insurers that you are on top of risk issues – particularly those you know they have asked about in previous proposal forms.
This is also a good time to undertake a review of any open claims or circumstances that have been notified to insurers, to see if there are any that can be closed in advance of renewal.
We also suggest you review arrangements for completion of proposal forms. The completion of comprehensive proposal documentation is particularly important for those firms looking to access the market and secure alternative quotes. Delays in making a timely submission to insurers due to the need to complete additional forms could be a barrier to securing alternative terms. At Howden, our proposal form and Business Resilience Questionnaire are comprehensive and widely accepted in the market.
Ideally we would suggest that your proposal firm is ready eight weeks in advance of your renewal date. Anything earlier than this can result in insurers complaining that the information is not sufficiently current at the point of renewal. However, given the time it takes to gather the relevant information, it is useful for you to review the forms at least three months in advance of your renewal date so that you know what is required and can identify who you need to rely on to produce the information.