The 2012 renewal for solicitors in England and Wales was less traumatic than many firms had experienced in previous years. The effects of the ARP were diminishing as we entered the final year of the ARP. Those insurers who were transparent about the loading on their premiums reduced their surcharge from the year before, as the number of firms in the ARP continued to decline.
An increasing number of unrated insurers have acquired a 12.5% market share between them. This high and worrying proportion, with a disproportionate concentration among the smaller practices, is potentially building up problems for the future. Although buyers may be under enormous financial pressures and looking to make savings wherever they can, we believe that this is a false economy. The Administration of Quinn in 2010, the liquidation of Lemma in September 2012 and the suspension of Balva this year are stark reminders that insurers do go bust and that solicitors should consider carefully the financial stability of their Qualifying Insurers.
Where an insurer does go bust, it is the firm's responsibility to seek a new policy within 28 days: effectively having to pay for their PII twice. After 1st October 2013, any firm with an insolvent insurer will no longer have the safety net of the ARP and will only have a one month window to seek replacement cover before having to cease to practice.
The long-tail nature of professional indemnity claims means that matters notified in the current period of insurance but not settled for some years to come, run the risk that they will be unpaid if Balva is unable to meet its obligations. Such a fate has already befallen firms insured with Lemma. As from 24th January 2013, any firm which had purchased a six-year runoff policy with Lemma has seen all such policies cancelled.
The reason that these unrated insurers are able to insure solicitors in England & Wales without being regulated by the Financial Conduct Authority is the EEA's single market rules on passporting. These allow foreign insurers to continue to be regulated by their home state regulator.
The SRA has always stated that as it does not regulate insurers, it should not create barriers to entry into the solicitors' PII market. Despite calls to allow rated insurers only, the SRA has refrained from introducing a minimum level of financial strength or rating. However, in view of the worsening position over the past year, the SRA has now agreed to launch an assessment into the “full implications of introducing financial rating criteria”. The review will be completed in time for any decisions to be made for the indemnity period starting on 1 October 2014.
As at the 2013 renewal, Balva no longer appears on the SRA website of qualifying insurers and the term “Qualifying Insurer” has been replaced with the term “Participating Insurer” in an attempt by the SRA to clarify that insurers have not been approved.
Contact Steve Holland for an up-to-date list of rated insurers serving the solicitor market.
2012 Premium Pot
The total premium paid by solicitors for the 2012/13 compulsory insurance was £239 million (down from £249 million in 2011). This represents a fall of 3.78%. Notwithstanding recessionary claims, the premium declared for each year in the commercial market has been below the final contribution collected by the SIF.
The commercial market has clearly been a success despite the problems caused to the profession and insurers by the ARP. In the report prepared by Charles Rivers Associates (CRA) for the SRA consultation in 2011, it was established that the average cost of insurance (including the ARP) in the open market has been around 1.4% of gross fees. This compared with 2.2% under the master policy and 3% under the SIF. CRA estimated that, had the master policy of the SIF continued, the cost of premiums would have been £412million or £557million respectively, for the 2008/09 period.
The Assigned Risks Pool
The number of firms in the ARP over the past two years is substantially down from the peak of 411 firms in 2010.
The trade-off for scrapping the ARP as of 1st October this year means that the last insurer is required to provide run-off for six years. If an insurer declines to renew an existing insured, and that firm is unable to find another insurer, the current insurer must extend their policy by 90 days. During the first 30 days - the “Extended Indemnity Period” - the firm is given the opportunity to find an alternative insurer. If an alternative insurer is found, cover is backdated to 1st October. If not, the firm must wind the business down within the next 60 days - the “Cessation Period”.
Variable Renewal Dates
From 1st October 2013, solicitors will be free to choose a renewal date that suits them.
There had been growing pressure from some parts of the profession to stagger renewal dates in order to alleviate the perceived difficulties in securing cover before the single renewal date. There are both advantages and disadvantages to having either a single renewal date or staggered renewal dates, and these depend upon the state of the market and the size of the law firm.
In a soft market where there is strong competition amongst insurers, the single renewal date can help to keep premiums down as the insurers, uncertain of what market share they may secure, are more likely to cut their premiums as the deadline approaches.
In a hard market where there is a lack of capacity, the single renewal date means that firms can be left with little choice and are forced to accept whatever they are quoted, as experienced in 2002 and 2005.
Staggering renewal dates throughout the year would relieve the pressure created by a single renewal date and allow underwriters to consider each business more carefully. This would be of most benefit in a hard market for those firms that appear to have a weak risk profile, perhaps because of their claims history, or the type of work they carry out. An underwriter will be able to spend more time understanding the risk profile of a firm, which he/she may have previously dismissed due to lack of time. This will help some firms to gain cover at a more affordable level.
The renewal date for many larger firms will change, no doubt, because they will want to choose a time of year that suits them. Some firms have expressed a view that they would wish to align their renewal date with their financial year end because it makes for easier budgeting, whereas others consider that to be worst time of the year because they are already working flat out on their year-end billing targets.
Firms should be aware that moving the date may mean they have less choice, as some insurers may not be ready to offer terms “out of season”. Careful consideration is needed in conjunction with the firm's insurance broker.
The Solicitors' PI Market in 2013
The anticipated influx of new insurers with the closure of the ARP has not materialised. Those insurers which had exited the solicitors' market over the past few years are not likely to return due to the current soft market conditions and poor underwriting loss ratios.
We have seen a number of exits including Aviva, RSA and Pembroke. Also XL, which has the largest market share at 16%, is withdrawing from the one to three partner sector and AIG, which held 8% of the solicitors' market in 2012, is pulling out of the market for firms with more than 35% conveyancing.
A scheme aimed at those firms currently with unrated insurers is being launched by the Law Society, with two new insurers to the solicitors market: Canopius and Ironshore.
Many insurers have been offering early renewals, usually aimed at their best clients, and typically with a short renewal form, rather than the full underwriting submission. These offers have typically been well received and have saved firms many hours of management time.
Lockton have access to a very wide range of (rated) insurance markets, including an exclusive facility with Inter-Hannover. If you are looking for alternative quotations, get in touch with our specialist Solicitor's Broking Team.
A more detailed report is available to clients via our logged-in site, or by contacting your Lockton Account Manager.