Solicitors’ Indemnity Insurance – Reflecting on 1st October Renewals
It may seem hard to believe but it is now 20 years since the Solicitors’ Indemnity Fund entered into run-off and the provision of primary indemnity insurance transferred to the open market. Although, for many, the period of time may seem to have passed quickly, numerous changes in the market have taken place over this period, and this has certainly been the case over the past year.
Significantly, insurer rates have been on the increase. Contrary to popular belief there is very little profit made by those insurers participating in the Solicitors Indemnity market. The past 20 years have seen a very significant number of insurers enter and subsequently leave the market, as a consequence of lack of profitability and losses arising from the long-tail nature of claims. The Solicitors Regulation Authority (SRA) sets the Minimum Terms and Conditions of the cover, which means that qualifying insurers can really only compete on price. After years of excess capacity and significant losses, in 2018 many insurers were obliged to submit plans for how they could write Solicitors PII cover profitably, and as a result a number of insurers chose to leave the market and allocate their capacity to more profitable lines of insurance. This year, as never before, everyone has been working in very different and challenging circumstances. The already hardening insurance market has been exacerbated by fears over Covid-19 and what losses could yet emerge in the form of claims against professional practices. Competition between insurers based on pricing all but disappeared this year and therefore the majority of firms ended up renewing with their existing primary insurers. Many commentators were predicting average premium increases of around 30% and the reality was not far off the predictions.
Clearly, where a firm’s gross fee income had reduced from 2019, this helped to offset the rate increases. 2020 also saw significant rate increases amongst the excess layer markets particularly where the attachment point was below £10M. 100% rate increases and a reduction in line sizes from excess layer capacity became the norm. With alternative capacity also in short supply, there were occasions where insureds opted to reduce their overall limit of indemnity in order to ‘manage’ the cost to their business.
Other factors at play…
Aside from the already ‘hardening market’ and the impact of the global pandemic and the resulting recession, there are other factors driving rate increases. The International Underwriting Association (IUA), who represent the majority of participating insurers, has proposed changes to the minimum terms that would mean policies could be cancelled in the event of non-payment, payments of excesses could become mandatory and would be deducted from claims, and payment for run-off cover would become compulsory at inception of a policy. They have warned the SRA that the credit risk taken on by insurers for the non-payment of premiums and excesses could become “commercially unacceptable”. However, to date, the SRA has maintained that policies cannot be cancelled for non-payment of premiums or excesses. As a result, a small number of insurers have introduced the requirement for personal guarantees from partners/members/directors of law firms in respect of run-off premiums due in the event of the closure of a firm and its inability to fund that run-off premium. This is clearly an additional burden that many law firm owners preferred not to carry and those insurers that insisted on them probably lost out to those that did not. It remains to be seen if this requirement is adopted by more providers in the coming months.
In general, insurers have been looking to increase policy excesses. Tiered excesses for claims arising from different work types are becoming more common, along with the removal of the capped annual aggregate, or at the very least an increase in the cap from three times to, say, five times.
This year also saw the introduction from a major insurer of smaller conveyancing firms of a significantly increased excess for conveyancers undertaking property development and investment work.
In the event that the minimum terms and conditions for participating insurers remain unchanged, it is difficult to envisage the market changing from its current upward trend in the next 12 months. It is, therefore, more important than ever to engage the services of a specialist independent broker with an in-depth knowledge, experience and understanding of the market, who has broad market access, to help navigate, guide and advise a practice through these difficult market conditions.