PII Focus: Chancery Pii

Chancery Pii (Chancery) was established as a joint venture between the Law Society and Miller Insurance Services LLP just under a year ago, as a direct access, online professional indemnity solution aimed specifically at the one-to-four partner market. Central to Chancery’s approach was that it would provide a market solution to the problems which have blighted the one-to-four partner market for many years.

Chancery was not established to grab market share; on the contrary, its fundamental principle is to provide a long-term solution to the solicitors’ market, backed by A-rated insurers.

In a market littered with insurer failure and withdrawal, including both rated and unrated insurers, how will Chancery succeed where others have failed?

The key to Chancery’s success is prudent underwriting, balancing the expectations of potential clients with the base costs and profit requirements of underwriters. Chancery looks at this in two ways.

First, Chancery looks to strip out unnecessary cost from the business, including acquisition costs. Chancery does not provide access to any broker and only deals directly with clients. The advantage of such an approach is that Chancery does not have to pay broker commission for placing business which can sometimes account for in excess of 25% of the premium solicitors pay.

Chancery’s running costs are significantly less than this amount and savings are passed directly back to our clients. In effect this means that the premiums paid are used to fund claims.

Second, Chancery has a prudent underwriting approach based around claims data. Despite only trading for a short period of time, Chancery has already collated and analysed data for 15% of the one-to-four partner segment of the profession, including claims data for the past 10 years. This means that the premiums Chancery calculates are fully reflective of the exposure and experience of firms.

Some results are surprising. For instance, we found that 98% of firms had risk management in place that most underwriters would consider to be excellent. This has turned the risk management debate on its head with the barrier in respect of acceptable risk management being moved significantly up. It is clear that those firms with less than good risk management procedures are in the minority and from an underwriting perspective will be avoided.

In terms of claims experience, it will come as no surprise that there is a significant volume of claims on an annual basis. As to whether the £254m net premium (source: Participating Insurer Declared NPW, 2003 to 2013) is sufficient to cover such losses, with the absence of market data this is open to debate. However, our own market data indicates that there is a significant market shortfall, with insurers paying significantly more in claims than they collect in premiums.

Perhaps this is one reason for so many insurer failures.

If so many have failed before, why is Chancery confident it will get it right? Central to our approach is consistency and an exposure-based pricing model. Being an online offering we can be confident that each and every risk is approached in a consistent and controlled manner. Furthermore, our premiums reflect the exposure of the firm applying for cover. Therefore, looking at the data, the three highest areas of claims are:

• conveyancing (43% claims / 60% of payments);
• personal injury (22% claims / 10% of payments); and
• litigation (5% claims / 6% of payments).

This information enables us to better predict the financial cost of claims for each area of work on an annual basis and make a more informed decision that our rates are sufficient.

In addition to stability, such an approach enables Chancery to consider all areas of practice with minimal restrictions and we are one of the few markets able to consider residential conveyancing without any limits of income earned. Furthermore, Chancery uses such information to price capacity above £1m, which means that Chancery expects to be one of the few markets which will be able to offer meaningful reductions should a practice wish to purchase less than £2m or £3m limits.

How has the recent decision of the SRA board affected Chancery? Chancery was critical of the timing of the consultation. While we are mindful that the Legal Services Board still has to approve the proposal, the changes to the limit of indemnity will only cause a minimal delay to us quoting business – and our expectation is that we will be doing so from mid-July.

Our response to the proposal for the reduction in the minimum limit was that we felt the limit was too low (even for low-risk firms) and we are unlikely to quote for limits below £1m. Given our approach to the market, we intend for those firms that do choose to purchase a limit of £1m, to do all we can if the SRA proposal proceeds to deliver to our clients a materially lower premium compared to 2013. This could deliver a saving in excess of the 5% suggested by some.

As a business focused solely on smaller firms, we have listened to the concerns of many smaller practices. We will restrict run-off coverage to the basis of the minimum terms, which we estimate will halve the cost of run-off.

Finally, we are mindful that the proposed changes could result in removal of firms from many lender or commercial panels and we are actively working on a solution to maintain coverage as close as possible to the expiry basis.

One year on, Chancery continues to try and make a difference to the one-to-four partner market, offering a viable alternative based around sound underwriting principles, and designed for the long-term benefit of clients and insurers rather than for short-term market share.

Tim Norman is director of Chancery Pii