Over 10,000 firms of solicitors in England and Wales will again be pulling together their applications for professional indemnity insurance (PII) renewal. Preparation is paramount because, as we all know, the 1 October deadline always comes too soon. As has been the case for several years now, insurers remain cautious and have not yet regained a healthy appetite for solicitors’ PI risk. Many are still operating on loss ratios approaching or exceeding 100%, making them even less hungry for new clients with potentially high-risk profiles. So what lies in store for solicitors?

The PII premium makes up the third-largest single expenditure for most firms of solicitors, after staff payments and office costs. Law firms have been tightening their belts over the past few years and, with this in mind, are taking a closer look at their PII. This review should include an analysis of the total cost of risk, how risk is managed, retained or transferred and, just as importantly, how they present the information required by PI insurers.

Further uncertainty is added this time round as it is the assigned risks pool’s (ARP) penultimate year of existence. Concluding a process that began in 2010, the ARP will close in 2013 for good, meaning this is an important year for firms to review their processes and improve their applications for cover. 2013 will be crunch time, but proper preparation can ease the renewal process.

The appetite for solicitors’ PI risk reached historically low levels in 2010. Despite some new entrants in 2011, a number of insurers (including RSA Insurance) have already announced they will not be accepting new business in 2012. However, some brokers (including Prime) are working closely with a small number of potential new A-rated entrants who wish to take advantage of a market in transition.

Risk zones

Insurer perceptions of the risks associated with solicitors are concentrated in a number of areas.

Size

Smaller firms are at most threat of not securing renewal as they remain a key area of concern. Statistical analysis shows that firms with two or three partners produce a disproportionate amount of PI problems, making insurers particularly wary of them. This may seem unfair as it is only a small minority of firms that fall into the ‘bad’ pile, but many insurers have trouble separating the good from the bad so choose not to take the risk at all.

Larger firms, however, are by no means immune to heightened insurer scrutiny. All firms applying for cover will have to bear close inspection, and large firms are usually the source of the largest claims. Merger-happy firms could also find problems coming to light because of ineffective due diligence during the merger transactions. In contrast, sole practitioners will often present a better risk profile for insurers, as there is no fraud cover provided to them by their PII and they are effectively covered by the Solicitors Compensation Fund.

Property

As with previous years, firms specialising in property, or firms with large practices in this area, are going to be closely scrutinised. Claims relating to property have accounted for at least 75% of claims since the property crash, so these firms will need to demonstrate particularly close attention to procedures and training, and present evidence of a sound client portfolio.

Alternative business structures

With regulators now approving ABSs, insurers have a new breed of law firm to underwrite. Outside investment and working with specialists across different professions present a whole new range of considerations for underwriters. This is uncharted territory, making them wary.

Securing renewal

The next few months are some of the most important in the legal year, with the outcome a matter of life or death for some firms. Firms need to prove they are well run and viable businesses that, most importantly, present little risk to potential insurers. Despite the clear importance of the renewal process, we are constantly surprised by the number of firms that fail to invest the necessary time in it. Firms need to devote both time and energy to this process and make sure they effectively project manage it. Having a clear structure for how the PII is prepared for, negotiated and renewed is essential. There are a number of ways in which the chances of successfully securing renewal - vital for survival - can be improved.

The first point to consider is the proposal form. This is what insurers, more than any other document, will use as the basis for your premium and as such it should be treated with care. The number of mistakes which appear on these forms can be mind-boggling, but a few simple steps can help avoid this. First and foremost, if you make a mistake, start again. Do not cross it out, just get a new form and start again. Second, if you do not know an answer, do not leave the space blank. Do not make assumptions and never guess or contradict yourself on this year’s form or with previous applications for insurance. Insurers compile and keep detailed records on all firms that they come into contact with and will cross-reference old proposals before offering you a quote.

If somebody within the firm cannot help with the completion of the proposal form, we recommend you speak with a broker with experience of dealing with firms of your size. Not only will they be able to help decipher what the underwriter is looking for, they will be able to help you phrase and present your response in the best possible way. Third, get somebody else to take a look at the form before it is submitted. Two or even three pairs of eyes are better than one, and can drastically reduce the likelihood of an error getting through.

On the whole, the proposal form needs to be professional, reliable and accurate. If it is not, insurers who are looking to back professional firms that do not make mistakes will see through it. With this form as your first (and potentially only) contact with the insurer, we cannot overstate its importance. The PII application process does not stop at the form. The process will include a detailed assessment of the firm’s claims history and financials, as well as likely meetings and interviews to establish the staff are safe and reliable people. You should provide accurate claims information from the past with a commentary on how you dealt with them, demonstrating corrective action taken and lessons learned. Detailed background such as this can greatly assist in giving the necessary assurances and could even be the deciding factor in whether or not you obtain cover.

Beyond this, underwriters will want to see evidence of risk management systems as well as a history of implementing them to positive effect. These things help to build a bigger and better picture of a firm, and help establish whether or not it is a safe pair of hands.

Accreditations

Lexcel accreditation and membership of schemes such as the Conveyancing Quality Scheme are useful in building a positive risk profile and showing that the firm is committed to high levels of quality and service. However, while these accreditations have always been of value to all insurers, they are not guaranteed paths to a lower premium: you need to prove all-round reliability.

You should be doing everything within your power to trigger the necessary green lights for insurers, providing compelling and comprehensive evidence of risk management, good service and quality control. Carefully appoint a specialist broker that is right for your firm. They can add value in many areas (including claims and risk management) and should act as an experienced gatekeeper and mediator, helping to present you in the best possible light with the aim of obtaining a better quote.

Ultimately, insurers want to know they are backing a reasonably safe horse, and, by taking the time and care required, you can make the best case to convince them that if they underwrite your firm, you will not fall at the first fence.

Martin Ellis, director and Colin Taylor, head of risk management services at PII broker Prime Professions