Lockton continue to act for a large number of legal practices who undertake a significant proportion of personal injury work. Through our continued engagement with these firms we understand and appreciate the potential challenges businesses are likely to face arising from the Civil Liability Act, should the continued endeavours of various groups and individuals not be successful.
It is clear that the proposed Act will present significant challenges to practices and could even result in a change in the direction of their business for some. From an insurance perspective, underwriters have stated that when reviewing a renewal submission, they will be placing a greater emphasis on specialist personal injury practices and those practices where personal injury is a significant revenue generator.
In this article, we outline the current market conditions, a summary on how best to prepare for renewal in light of the looming changes, also providing some guidance on how to articulate effectively with insurers should your business be considering implementing changes.
Current insurance market conditions
It has been well publicised in the legal press that the professional indemnity market is challenging. Whilst frequency of losses seem to have reduced, the severity of loss seems to be on the rise. In addition to this, over the last two years the volume of claims impacting upon the first excess layer above the compulsory layer of insurance has increased dramatically. This has no doubt contributed to the reported £500m of losses Lloyd's of London have reported, originating from PII. This has resulted in numerous Lloyd's syndicates exiting the class of PII, which has impacted on the compulsory primary insurance market, which has had a significant impact on the excess layer market. With severity of losses up and a reduction of capacity, excess layer insurers premiums are rising significantly due to rates rising by over 50% in certain cases.
Considering the above, there are clearly challenges to be overcome, however there is still competition and naturally insurers will wish to align themselves with good businesses.
Preparing for renewal
With the removal of the common renewal date in 2013, practices now renew all year round. Despite this flexibility there remain two peak periods: September leading to October 1st renewals and from February through to April, for both March and April 1st renewals. If you renew around these times you will be doing so with a number of your peers, so it's important that you present your practice appropriately.
When preparing for your renewal this year, our advice would be to do so as early as practicable. Insurers will be seeking commentary as to the strategy that is in place at your firm and the impact the reforms will have. We anticipate that insurers will place even greater scrutiny on the financials of the practice, they will want to know the current performance of the practice, and more pertinently the financial forecasts for the next 12-24 months. With all of the above to take in to account, it will be sensible to engage with all relevant stakeholders within the business as early as possible and ensure all information is available to review before starting to complete a renewal presentation.
We recommend that you tackle all of the above questions up front and provide the answers to insurers within your renewal presentation. Professional indemnity insurers will have an understanding regarding the impact of the changes on certain practices, but they will also be seeking some comfort that a plan is in place, which is supported with accurate financials.
Below are some of the examples of what insurers will want to know and how best to approach these scenarios with them.
- Intention for the business post the Civil Liability Act
- Are you going to be impacted?
- If you are impacted, what measures if any have/will be introduced.
- Are you going to enter a new area of law?
- Who will be undertaking the work? Do they have the appropriate level of experience
- How will the work be acquired?
- What financial impact is the new work anticipated to have on the business
- What processes will be implemented to manage the new risks?
- Will your focus be shifting to larger value injury matters and clinical negligence work?
- How will the work be generated?
- Will processes change to align with the demands of the work? Do current fee-earners need re-training?
- What are the financial estimates for this work?
- Are you intending to make an acquisition?
- Key reasons for the acquisition
- Are you intending to take on past liabilities of the practice in question?
- Intentions for the combined business moving forward?
Considering change to your practice?
Insurers do anticipate changes to occur as a result of the Act, even if it doesn't get passed and your firm is still considering making changes, it is important to share these with your insurers and/or prospective insurers. You have an obligation to disclose this information under the iew Insurance Act, therefore it's important to advise your insurers as this could result in you no longer being right for one another in the long term.
If changes are intended to be significant, we would strongly recommend approaching theses change to your business, similar to what a new start up business would do when they are seeking insurer capital. As such we would suggest it to be prudent to share your business plan with insurers at the earliest possible opportunity.
We must stress the importance of engaging with your insurer as soon as the business is aware of what it will be doing, but before executing that strategy. The proposed or implemented changes must also be presented to insurers when the PII renewal falls due. There will be insurers who will have significant concerns for those firms who have a significant exposure to personal injury work, it is vital that you work with a broker that not only has a broad access to insurers, but also one who understands the challenges that the industry is facing and how best to circumnavigate the plausible insurance implications.