Solicitors’ 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……”brutal”. It was undoubtedly the most difficult renewal we have experienced since solicitors moved their insurance arrangements to the open market in 2000.

The factors that combined together to create the perfect storm were:

• Ongoing pressure on insurers to increase rates as an outcome of the Lloyds Review that was published in July 2018 and identified PII as a poor performing class of business

• Significant losses arising from solicitors’ involvement in failed buyer funded developments and other investment schemes

• Sensitivity to the potential for additional losses from claims arising as a result of the Covid-19 lockdowns and the downturn in the economy, including a possible fall in the property market

• Concern at the potential for significant “law firm failure” with firms unable to pay the premium for the 6 years run-off cover insurers must provide.

Below we set out a summary of the relevant issues and some high level analysis that will be of interest to firms that renewed on 1 October and also those who have their renewal in the coming months. It is important that firms know what to expect and are prepared.

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 the 1 October 2020 renewal the amount of form-filling 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. In most cases this took the form of an additional Business Resilience Questionnaire. Excess layer insurers had introduced their own proposal forms for the 1 April 2020 renewal and continued to require completion of additional questions for most cases. Finance providers also wanted more information and introduced their own additional questions.

It was a slow start to renewal while we all waited for insurers and finance providers to finalise the information they required. More time was then needed for firms to prepare the information and for insurers to process and consider it. The inevitable result was that the season ran much later than usual.

For those firms that renew on 1 April 2021 or during the preceding months, we urge you to start the process early. 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 forecast 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 increases of 30%, but those with bad claims histories should expect far higher increases”. (www.lawgazette.co.uk/news/firms-told-to-brace-themselves-for-october-pii-hike/5105419.article).

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 and extent of conveyancing 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 an unaggregated excess was also applied or referenced to certain work or claim types.

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. It nonetheless remains an important purchase, given both the increasing incidence of high value claims and the regulatory requirement for firms to ensure they have “adequate and appropriate” insurance.

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 new business and also reduced their capacity to 50% for all firms of 10 partners or above. Others set out very restrictive criteria for new business, with most putting a limit on the percentage of conveyancing work as a proportion of gross fees. For most, their upper limit fell within a range of 20% to 30%.

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 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 for 1 October.

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, the proportion of the Howden book that moved insurer was 12% which is consistent with April 2020 (13%) and October 2019 (10%).

18-month policy periods

Despite premium increases, law firms were still interested in 18-month deals, but insurers mainly 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 LLPs or other incorporated practices to provide personal guarantees in some cases. 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 to 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. Given that Covid-19 remains an issue, the potential for further lockdowns and the impact on the economy, firms need to prepare for the position to get even tougher.

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. (www.lawgazette.co.uk/practice-management/pii-renewal-or-run-off/5105510.article) The rationale for closure is that the run-off costs will be less now than after renewal, given that they are always based on a multiplier of the expiring premium. We expect that there could be more commentary and discussion along these lines in the coming months.

Our 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 we have a team that is dedicated to the legal sector. Our 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 100 firms. We also have direct access to “A-rated” insurers including some exclusive arrangements which enables us to continue to find solutions for our clients in these difficult times.

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.