Play PI spy: It's solicitors professional indemnity insurance season
The solicitors professional indemnity insurance (PII) renewal season is upon us once again, and early indications are that the market is beginning to show signs of hardening. It’s worth considering where and why we are seeing these changes, so that firms can best prepare for not only this renewal period but for renewals in the future. What is the most important factor to you when selecting your professional indemnity insurer, and what should you be looking out for?
In the excess layer market, several key insurers have withdrawn completely from writing professional indemnity. These insurers had significant excess layer books, which they no longer wish to insure, and the underlying reason for this is clear – claims. Despite a relatively benign claims environment, solicitors still incur a significant number of attritional losses, even during a time when the economy is growing. It’s inevitable that some of these losses will spike into large quantums that can wipe out all the premium earned with very few claims. Therefore, in the current market, insurers either have to increase their rates significantly or decide that their capital is best allocated in areas that provide better opportunities to produce a profit for stakeholders. Currently, many insurers have chosen to withdraw completely while those who remain are seeking to increase their rates.
In previous years, new capacity would have entered the market and nullified the impact of these changes, and prices would have stayed relatively flat. But if we consider the current broader economic and political situation, there is significant uncertainty, which means that insurers are reluctant to come in and take over books of business that have been generating loss for others. Underwriters simply cannot make a sensible business case to management.
Moving to the primary market, there again appears to be a desire from insurers to increase rates. There have been many high-profile construction losses in the wider professional indemnity market, and solicitors, given the depth of cover provided by the minimum terms and conditions, continue to suffer consistent losses. Diligent insurers will closely manage their portfolios to ensure that they can continue to write the class of business over a sustained period of time. Sometimes, this will lead to rate increases that no firm likes to see but which, in a cyclical economy, are inevitable. While no one can predict with any certainty what the economic position will be in a year, we cannot ignore that it’s now been 12 years since the last downturn. Interest rates are starting to rise, the housing market is uncertain and many insurers suffered significant losses last year.
There are those who would argue that we’ll never see a hard market again (where prices rise significantly and choice is greatly reduced) but there are signs that we are approaching one. For law firms, partnering with the right insurer at this time is essential. Price will always be a factor, but it should not be the only factor. Take the time to go into detail about your insurer’s capacity and the strength of its balance sheet. What is its track record in the market and what is its underwriting philosophy? What other services does your insurer provide? There is a great variation in product offerings outside of the standard wording.
Finally, at a time when many firms are growing, it’s imperative to ensure all staff continue to adhere to your risk and business management procedures – it is the work you carry out now that will be under scrutiny in years to come should the economy turn.
Janine Parker is an LPM columnist. See this article in the full issue of LPM September – Table plans.