PII: stabilising the cycle

The latest information records that 180 firms have notified the Solicitors Regulation Authority that they have entered into the extended indemnity period (EIP), the mechanism for firms that are unable to obtain a professional indemnity insurance policy by 1 October. We expect the number of firms within the extended indemnity period to fluctuate as practices continue to seek and secure cover. This is similar to previous years when firms entered the assigned risks pool and exited by obtaining cover within 30 days.

Last year, only 25 firms remained in the ARP at the end.

Our interim assessment suggests that the market overall has been benign with rates flat or marginally down, but with a numerically small segment facing acute difficulties. There are clearly two markets operating. Large firms are able to obtain cover relatively easily with a number of rated insurers available to consider applications on an open market basis. This is not the case at the smaller end of the market. It is likely that most firms unable to secure affordable quotations or any quotation at all are small and medium-sized.

Difficulties within the 2013-14 renewal stem from the continued trend of withdrawal from the market of rated insurers due to unsustainable underwriting losses; most notably XL, which withdrew from the 1-3 partner segment. This effect was compounded by the aborted transfer of policies from Balva (an unrated insurer in administration) to Berliner Versicherung Aktiengesellschaft (‘Berliner’), which left around 1,000 solicitors seeking insurance in the final weeks.

This renewal period has reinforced our concern about the cost and quality of the advice given by some brokers. We have raised our concerns about this with the Financial Conduct Authority. Equally worrying is the number of small firms turning to unrated insurers.

At the time of Balva’s failure in June, the Law Society warned affected law firms to carefully investigate their alternatives and make an informed choice before opting for cover from another unrated insurer. We were aware that firms were being offered to transfer policies across to Berliner and warned our members against simply transferring to another unrated insurer without investigation. We had seen this pattern of insurer entry and exit before.

This cycle has destabilising effects for members and the Society hopes to see changes in the solicitors PII market that will help to create and maintain stability. We note that the SRA will shortly commence a review into this issue.

The Society has deployed a consistent and strong education campaign over the last few years with warnings about the financial security of insurers. A wealth of guidance has been produced to help members use the market to their advantage.

But education is not enough. The Law Society has been proactive in encouraging rated capacity into the 1-4 partner segment of the market, the area that we identified as the most unstable. We created Chancery Pii as another option for firms to consider that seeks to promote security, quality and stability. We look forward to developing this offer for our members for next year.

If firms in the EIP are unable to obtain a policy of qualifying insurance they will have to plan to close in an orderly fashion before the end of the year. We recognise that there is a very human cost of any firm failure. There is support available for firms within the extended indemnity period and cessation period facing some very tough decisions.

Nonetheless, the SRA will need to take effective measures to ensure firms do not continue to trade without insurance beyond this period, otherwise the entire profession will pay for any uninsured claims via the Compensation Fund.

Help is available from the Law Society, on its website and here.

Desmond Hudson is chief executive of the Law Society