Solicitors PI : Reflections on 2023
Professional Indemnity insurance for solicitors – our reflections on 2023
With the 1st October renewal season now behind us and the end of the year in sight, it’s a good moment to stand back and reflect on some of the major themes emerging from the annual process that is Solicitors PI.
After four years of hardening market conditions, accentuated by the pandemic, during which time there was little appetite amongst SRA-qualifying insurers for new solicitors PI business, 2023 showed a softening of rates with carriers having to compete harder to retain and grow their books. This was driven in part by the arrival of new capacity into the market, principally in the form of Fortegra Specialty Europe Ltd who were writing solicitors PI for the first time.
Solicitors PI – Winners and losers
Those law firms that benefited from the softening of rates tended to be larger practices with only modest or no exposure to Conveyancing, a strong track record on risk management and a superior claims experience. Some of those winners enjoyed absolute premium reductions of 25% assuming no major change in fee income, whilst similar practices that had material fee income growth enjoyed broadly unchanged premiums. Not surprisingly, those law firms that felt no benefit from a softening of rates tended to be the polar opposites of the ‘winners’; smaller practices with fewer than four partners, especially those with modest fee income levels and an over dependence on high levels of Conveyancing (where consumers are extremely price-sensitive leaving little opportunity to increase rates), and a challenging claims experience. In many cases, firms will have had no alternative but to accept the renewal terms offered by their current insurer.
Of increasing concern to qualifying insurers was the financial health, or otherwise, of their insured practices with some carriers wanting to see two years’ worth of signed and dated accounts. The insurers’ concern is to avoid, so far as possible, any exposure to practices whose poor financial health might increase the risk of a firm choosing to put its cover into run-off, and then that practice not being able to pay its run-off premium, leaving its insurers with potentially huge liabilities. In some cases, insurers have asked law firms to confirm whether or not, in the event that the firm decided to close, it has the financial resources to cover its run-off premium.
Where once it was a normal aspiration for an ambitious young lawyer to advance to become a partner, law firms now find it increasingly difficult to persuade the next generation to step up to the responsibilities of ownership; a reluctance to take on the regulatory obligations of ownership is commonly cited explanation. For smaller, often traditional high street practices offering a broad mix of work types and an aging ownership wishing to retire, or at least to step down to becoming a consultant, this presents a very real succession problem. The answer to this problem might have been to find a willing and suitable neighbouring firm to become successor practice, and thus allow the retiring owners to exit in a compliant manner, and to continue practicing as a consultant. But finding such a willing merger partner is a challenge. Law firms are wary of the burdens that they may be taking on; the time and expense of integration, the additional PI cost associated with adding the closing practice to their policy, particularly if there is a proportion of Conveyancing and other high risk work involved, and the fear of a claim arising out of the acquired firm’s past work, even if the due diligence process gave it a clean bill of health.
In the absence of a clear succession plan or a friendly merger, the only alternative for an orderly closure is to put the firm’s PI policy into run-off. But at around 300% of the expiring annual premium, for a modest high street mixed practice, funding that run-off premium may be extremely difficult. If recent claims activity has pushed up a firm’s premium in the final years, the resulting run-off premium will be an impossible burden for some. And this is what alarms insurers; the insured failing to pay their run-off premium but nevertheless having to provide six years of run-off cover. Faced with such a difficult situation, we have been able to persuade a number of insurers to accept a reduced premium, rather than see a distressed insured firm go into administration and fail to pay any premium at all.
Our advice to any firm facing such challenges is to talk to us and allow us to talk to your insurers. It’s in their interests as much as it is in the insured’s to find a solution early, and before events take over.
Article provided by Andrew Kenyon, Director, Cox Mahon
About Cox Mahon
Cox Mahon is an independent FCA-regulated, specialist PI broker with over twenty years of experience of arranging Solicitors PI insurance. From offices in Shrewsbury and London, we act for law firms of all profiles, from sole practitioners to multi-partner firms, and from single discipline specialists to traditional mixed practices. If you would welcome a discrete conversation about any aspect of your firm’s PI insurance arrangements, we would be very pleased to hear from you.