PII update: underwriting on the wall?

The Gazette’s regular snapshots of the professional indemnity insurance market are no longer in danger of becoming repetitive. Until very recently – and for the fourth year in a row – premiums were being described almost universally as ‘stable’ and the overall market as ‘benign’. 

In recent weeks, however, warnings of potentially tighter times ahead have crystallised in a tangibly ominous development. Providers connected with troubled Lloyd’s of London have bailed out of the PII market altogether, with as yet uncertain consequences. 

As lawgazette.co.uk revealed last month, Libra Managers, which provides cover to 20 of the top-200 law firms, confirmed it would not underwrite any new business from 1 October. That left 10 of the 20 firms, for which 1 October is the renewal date, with just six weeks to find a new insurer. 

City of London-based Libra’s decision followed reports that Lloyd’s has initiated a strategic review of the whole business in response to a £2bn loss last year. Lloyd’s chairman Bruce Carnegie-Brown told Reuters that Lloyd’s is looking at all aspects of its business – including how it mutualises risk.

Explaining its decision to exit PII, Libra told the Gazette: ‘After careful consideration Libra has concluded that current market conditions are not compatible with sustainable and responsible underwriting.’ 

John Wooldridge, of solicitors’ PII broker Howden, said Libra’s departure could have potentially ‘frightening consequences’ for all law firms seeking insurance in the runup to 1 October, which remains the most common renewal date for the sector. 

Some upward pressure on prices appears certain – especially as Libra is not the only provider linked to Lloyd’s to have pulled out. On 1 August Aspen Insurance UK revealed that after reviewing business written on the Lloyd’s platform, international professional indemnity had ‘disappointed’ and therefore Aspen would cease to underwrite this book.

‘For the first time in many years the solicitors professional indemnity market is hardening, and more firms may find it difficult to obtain competitive terms,’ says Patrick Bullen-Smith of broker Hera Indemnity.

‘Participating insurers, including Lloyd’s syndicates, are having to realign their pricing and are looking to “hold rate” as a minimum. This means that an increase in fee income is translated directly to increased premiums, regardless of claims experience.’

Bullen-Smith adds: ‘This hardening market is aggravated by reduced excess layer capacity, and as a result a number of insurers have recently exited the PII market. Those insurers that remain have adopted a more cautious approach to pricing.’ 

Brian Boehmer, partner at broker Lockton, describes the 2018 renewals season as ‘a little bit slower’ than in previous years, with developments at Lloyd’s indicative of emergent market volatility. 

‘The recent results of PI providers within Lloyd’s of London have resulted in a call to action,’ says Boehmer. ‘Lloyd’s is currently challenging its syndicates’ forthcoming plans to ensure that there is a route back to profitability and failure to do so may result in them not being allowed to write business. 

‘Whether this was the catalyst or merely coincidence, Aspen and now Libra have advised that they will no longer be writing this class.’ 

He adds: ‘Lack of capacity above the compulsory layer, stemming from insurer exits as a result of losses has meant that those firms that buy additional coverage are paying more; particularly for their first excess layer up to £10m. Insurers that participate in this space are making some price adjustments due to applying rate increases.’ 

Yet it is far from all ‘doom and gloom’, as Boehmer stresses. ‘There is still lots of choice available from the right broker and there are steps firms can take,’ he says. ‘This season, [Lockton has] seen that those firms that spend a little more time in their presentation to provide a greater insight into their practices and help them stand out from the crowd are generally reaping the reward.

‘There should be plenty of choice, but it is important not to be complacent, the insurance cycle can turn quickly. Select the broker who is representing you carefully; direct access could prove to be important if you would like a swift resolution.’ 

Indeed, brokers are unanimous in stressing that time is of the essence, urging law firms not to procrastinate. 

‘For firms that haven’t already begun preparing their presentation, I recommend that they do so, without any further delay,’ Boehmer advises. ‘If the market does turn, any of the last-minute shoppers may find themselves in a very different place this year from what they have experienced in the past. Forewarned is forearmed.’ 

Bullen-Smith concurs: ‘This is not the year to “leave it late”,’ he stresses. ‘Firms should look to review and conclude their PII arrangements as soon as possible to avoid being caught by rates that are likely to harden further as the 1 October renewal season draws to a close.

‘Solicitor firms with a historically good claims record will always be in a strong position to negotiate their premiums, but to do so they need access to all the relevant insurers and to approach them early.’

Paul Bennett, partner, professional practices & employment at solicitors firm Aaron & Partners, also offers reassurance. He believes the market remains favourable overall – particularly for non-property firms. 

Providers are not being slow to innovate, certainly. Last month, for example, Marsh launched a PII product for small and mid-sized law firm clients which it claimed is the first of its kind to use analytics and independent performance data to model a law firm’s individual risk profile. ‘As a result, law firms will receive tailored pricing based on their risk management performance and claims histories,’ it added.

Broker Paragon, meanwhile, has announced an exclusive arrangement with AIG for two- and three-partner practices. 

The onus on providers to innovate as the market tightens is sure to intensify, especially as law firm clients pose different questions about the risks to which they are exposed. 

‘I am suddenly being asked about my view on the add-on policies such as crime, cyber fraud, and directors and officers (D&O) insurance covering SRA investigations and cases,’ Bennett tells the Gazette. 

‘It is essential that firms confirm what the policy covers. If it is General Data Protection Regulation (GDPR), data loss and IT systems loss, then a cyber policy possibly will exclude theft and fraud on the client account. If firms want to insure for this they need to take a crime policy. 

‘D&O-wise, the choice of solicitor should be checked. Defending solicitors is a specialist skill-set and only a few of us really do it day-in, day-out. When your career is on the line expertise is essential.’ 

There are more questions than answers, at present, as solicitors await the outcome of the SRA’s reheated and highly controversial proposals to reform PII. These would cut the minimum single claim limit it requires firms to insure for to £500,000 – and £1m for conveyancing work. 

A final report is likely to go before the SRA board in October, with a final decision expected around the turn of the year. 

Whether these reforms will cut premiums remains a moot point, to say the very least. The Association of British Insurers is among many to have warned that this is far from guaranteed.