Low rates, but for how long? by Janine Parker, Paragon
This article was originally featured as a column in the May 2017 issue of LPM. To read the issue in full, download LPM.
We have recently finished the new ‘mini solicitors’ renewal season that now exists in the professional indemnity market place. Many firms now renew on 1 April, whether on an annual basis or by taking advantage of locking in their rate with an 18-month policy. Many firms are also enjoying an increase in fee income, which is just as well because there is to be another increase in insurance premium tax (IPT) to 12% – frustrating, given this is a tax on a compulsory purchase.
The good news is that initial estimates would suggest a saving in rate on income of around 10%. This is another significant reduction in a market that has seen year-on-year rate reductions since 2011. But how long these reductions can continue without insurers creating loss-making portfolios remains to be seen.
While we’re still in a relatively benign claims environment, insurers are still paying out significant claims. Property remains an area of high risk in this respect, and one area that experiences significant claims, no matter where we are in the economic cycle, is wills, trusts and probate.
At all times it would be prudent to remember the lessons learned after the last credit crunch. Disciplined file management, attendance notes, records of instructions received and especially undertakings are all an essential part of maintaining good risk management.
So, why do we continue to see rate reductions when margins for insurers are being squeezed? There are several factors that can be put forward: outside investment in the insurance industry is still high given interest rates and therefore insurance continues to offer an attractive ROI. This excess of capacity means that rates continue to be driven down and it will only be when this slows down that we may see an adjustment. Timing – professional indemnity insurance is long tail business, and usually insurers don’t know the accurate claims position of their portfolios until after four years. Finally, solicitors still pay a higher rate than all the other regulated professions – which is attractive to insurers that require income and was very apparent during the build-up to the recent 1 April renewal date.
The reality is that, sooner or later, the situation will change. The economy will adjust and interest rates, however slowly, will rise to fend off any potential inflationary and currency issues. From the macro market of solicitors’ PI, the patterns, underwriting behaviour, pricing and market manipulation all feel very similar to 2005 and 2006.
In addition, we don’t know the impact Brexit will have on our economic output and it’s highly likely we won’t know for at least five years if indeed we will ever know at all.
All we can do is manage the factors that are within our control. Ensure that your file management and risk procedures are being adhered to by all staff. Make sure that your business is financially secure. Consider levels of borrowing and costs closely. Indeed, consider whether the costs that you charge for your own services are sustainable for your practice – less can be more. No matter what the future holds, ensuring your practice is running on a solid and sustainable foundation will stand you in good stead for the present and the future.