Leading up to the latest renewal season there was plenty of publicity concerning the insurance market place and the possibility of rates hardening. Following the conclusion of the March and April renewal season and practices are now in receipt of their policy documentation we can reflect and report on what has occurred during this renewal period, using our portfolio of clients as the basis of our consideration.
Setting the scene
From those firms that renewed in March and April we were pleased to see that on average practices fee income had increased over 7% year on year. It must be noted that whilst we observed a slight deterioration in residential conveyance fees, we saw notable increases in fees being generated from commercial, private client work, and commercial conveyance work.
The number of participating insurers remained the same as in October, with no further participating insurer exits and no new capacity in the market.
Due to significant losses experienced, the Lloyd's of London landscape is in a state of change. This has resulted in a number of corrective measures taking place. A requirement has been placed on numerous Lloyd's syndicates to realign rate and push through increases across their respective portfolios. Many of these syndicates have a reduced premium income ceiling, which means we currently have both reduced capacity and increasing rates in the Lloyd's of London Market.
The claims environment is changing, it can no longer be described as benign. Whilst frequency of claims are at a manageable level severity of losses have increased significantly. This has resulted in the number of claims exceeding the compulsory primary layer which has a direct impact on the layer above. Some of these large losses are a result of investment schemes or developments failing. There have also been a number of large losses arising from commercial work and emanating form wills and probate work undertaken for high and ultra-high net worth individuals, causing considerable impact on the market.
What happened during this renewal period?
In our October article we predicted that the “working layer”, which is the first additional layer above the compulsory primary layer up to £10m would continue to be challenging. This has continued to be the case during this most recent renewal season.
The lack of capacity has served as a catalyst where rates have increased by over 50% on average. In some instances the cost of this layer could have more than doubled, with the worst affected practices being London based firms undertaking commercial and property work along with those practices with substantial claims activity. The increases applied by insurers were regardless of whether a practice had experienced any claims activity. Whilst any increase in pricing is difficult to accept, it is important to consider that even with these increases when compared with other professional service firms insurances the cost remains reasonable. If insurers continue to experience further large losses that directly impact upon these layers of insurance, further price corrections are likely.
The issues highlighted above in Lloyd's of London, naturally impact those facilities that were backed by Lloyd's syndicates. This resulted in some practices receiving quite severe price corrections or in some instances not obtaining renewal terms from their incumbent insurance providers at all.
We summarised above some of the large losses experienced were a result of failed developments, as such there were issues experienced for practices that have a property and development exposure, even if they have not experienced any claims.
Insurers and brokers alike would have been aware of the potential issues that may affect their clients. When they become aware of a change in underwriting approach or a reduced appetite they should really communicate this to their clients in good time, allowing those firm's affected time to make alternative arrangements.
Giving bad news is never an easy thing to do, but unfortunately, we saw on more than one occasion select brokers not communicating to their clients, or doing so very late on, therefore giving those practices very little time to react or any time at all in certain circumstances. In respect of some of the new practices, that we are now privileged to represent, their now previous brokers failed to communicate these changes well enough.
It is certainly not just the broker and insurers fault, as some submissions that we saw very late and close to renewal contained very little information about the practice and certainly did not meet with the practices duty under the Insurance Act 2015, to make a fair presentation of their risk. To meet this duty, practices need to disclose all material information to insurers known to them. Under the insurance act, practices are required to submit any information that would influence the judgement of an insurer in establishing premium or determining whether to underwrite the risk and on what terms. Sending in a two page proposal form summary along with providing out of date claim summaries falls short of these minimum requirements.
The lion's share of all practices insurance premium spend will relate to the compulsory primary layer of insurance. To reflect on what has happened during this renewal period we need to look at different size segments of the legal profession of England and Wales, as the experience differed enormously depending upon the size of a practice.
Whilst there were price corrections for smaller practices with a fee income of less than £10m, overall the commercial market performed quite well for this size segment of the legal profession with rates increasing on average by 3.15%.
For larger practices, those with a fee income greater than £10m the insurance market was not so kind and the rate applied on fee income increased significantly on average by 36.04%. Some of this may have been driven by claims activity by the profession as a whole and not necessarily by the individual practices themselves.
It is important to note that smaller practices generally pay a significantly higher average rate on their fee income than larger practices, due to the size discounts applied by each of the participating insurers.
Many firms have become accustomed to renewing around this time of year, away from the summer holidays and close to their financial year end. As such perhaps this influenced the buying style of a number of practices with only a third of the new business that we placed and 25% of our renewal clients wishing to take longer terms deals.
It is important to note that some insurers were reluctant to offer longer term deals particularly to practices that had a high percentage of conveyance. If an insurer was prepared to provide a longer term arrangements some insurers charged for the privilege. In less challenging market conditions these longer periods would have been charged on a pro rata basis with some insurers historically even incentivising practices to take longer term deals.
When comparing this latest renewal period with that of October, continuity of insurer remained a priority for the majority of practices. We did however see the number of our clients wishing for us to place their insurances with an alternative insurer increase to 5.7%, up from 4.5% in October.
We found that our extensive direct market access helped provide our clients with numerous choices at the point of their renewal this season, regardless of their size or the profile of their practice. This is evidenced by the fact that during this renewal period we placed our clients business with a large majority of the leading participating insurers.These placements involved 14 different insurers during this period for the compulsory primary insurance. Providing our clients with such choice, helped us maintain an enviable client retention rate of over 97%.
We predict that further adjustments in the working layer pricing are likely. This is largely due to the lack of capacity available for this layer with possibly some adjustments in pricing for the compulsory layers too. Rates may rise, particularly in certain areas of law that are worse affected by claims.
Despite this there should still be some level of optimism for well-run practices as there remains healthy competition for business in the compulsory primary layer of insurance, even for those firms that have had some challenges, providing that they deal with matters well in advance of their renewal, there will be insurers willing to listen and quote if there is a compelling story.
Insurers naturally want to align themselves with well-run practices. Just because a practice has experienced claims does not mean that they are uninsurable. However, due to the conditions in the market, those firms that provide insurers with a mediocre presentation, will consequently be viewed in a negative light by insurers and quoted accordingly - or they may not provide any offer of terms at all.
It is essential to prepare for your renewal early, and to ensure that you are presenting your practice appropriately. Giving insurers a greater understanding of your practice can pay dividends in the long term, and help us do a better job for you.
Early engagement with your Lockton representative is strongly recommended. If you are not currently a Lockton client please contact any member of the Lockton Solicitors team who will be happy to assist you in best preparing for insurers consideration.