At a glance
- Following major changes to the solicitors’ professional indemnity market last year, six months on there are still many unanswered questions
- Last year saw 136 solicitors forced to close following renewal, as they couldn’t obtain cover
- Zurich remains committed to the market and offers a stable, long-term option for well managed solicitors
After the chaos of last October’s professional indemnity renewal round for solicitors, the market is already gearing up for more of the same in the coming weeks and months as 2014’s renewal season kicks into gear.
Last year saw, for the first time, the introduction of flexible renewal dates, whereby October 1 is no longer the compulsory date for solicitor renewal policies.
In addition, 2013 saw the abolition of the assigned risks pool (ARP) – a safety net for solicitors unable to source insurance, allowing firms to continue to trade – and in its place the establishment of an extended indemnity period, which gives solicitors 30 days to source new cover or be forced to begin running their businesses down.
Early turmoil gripped last year’s renewal season following Latvian underwriter Balva’s withdrawal in June. Unrated Balva insured approximately 1,500 solicitors in the more volatile smaller end of the market. Fellow unrated insurer Berliner, the German underwriter, was expected to pick up these firms but it too performed a late exit,rocking the market.
Glossary of terms
October 1 renewal – Traditionally, solicitor professional indemnity policies had a common renewal date of October 1. Now, solicitors are free to choose a renewal date that suits them, such as to align their date with their financial year-end. Longer periods of insurance may be an attractive option to some.
Assigned risks pool (ARP) – A safety net for solicitors unable to obtain insurance in the open market, the ARP was funded by participating insurers by way of an agreed percentage of their gross written premium and it allowed firms that could not get insurance cover to continue to trade. The ARP was a costly place of last resort to both solicitors and insurers and was frequented by firms with poor loss histories and little risk management awareness. It was abolished in 2013.
Extended indemnity period – In place of the ARP came the extended indemnity period, which gives solicitors unable to source insurance at the end of their current policy 30 days to try to obtain qualifying insurance. Solicitors can still practice in this period, but after this time firms will enter a cessation period of 60 days where they cannot accept new instructions and only perform existing work. If the firm is still unable to source insurance after this time, then it will have to cease practice and its last insurer will be required to provide the firm with the compulsory six years’ run-off cover.
Rated versus unrated insurers – The Solicitors Regulation Authority is considering imposing a rating requirement in an effort to avoid the problems of recent years when some unrated insurers have become insolvent. It is currently consulting on the matter.
Jackson reforms and the Mitchell case – The Ministry of Justice reforms were expected to reduce the cost of litigation, but cases such as Mitchell v News Group, and the strict enforcement of the reforms, are already resulting in notifications in respect of litigation work. Non-compliance with court rules in the future is likely to cost solicitors dear.
There was also a significant reduction in appetite from XL Insurance, a market leader in the rated insurer space, moving from 16.5% of market premium to just 2.2%.
These issues combined to eventually see 136 solicitors forced to close following the 2013/14 renewal as they could not obtain cover.
Due to the high frequency of claims, low premiums, the poor financial stability of many firms and the requirement to provide six years of run-off cover, 15 out of 37 insurers have now quit the market completely in the last five years alone.
All of which suggests that brokers’ solicitor customers must attempt to try and secure cover with stable, long-term players such as Zurich, who remain committed to the market.
“On the question of rate and appetite there is a view that with the closure of the ARP and the fading of the recession the position is much improved – which will drive premiums down and the entrance of new players,” said Jenny Screech, Zurich’s Legal Professions Manager.
“Unfortunately, such an analysis ignores the realities of this market. Firstly, the closure of the ARP is not the panacea that is suggested. It does not mean that ‘uninsurable’ firms have suddenly disappeared – they still exist and for the future will be retained on the books of the last insurer on record.
“This means that an even greater level of underwriting discipline will be required if an insurer is to avoid absorbing these losses on to their own balance sheet – losses which in the worst year of the ARP currently sit at £42.6 million incurred.”
With the help of a broker, prudent law firms should be starting their renewal process in May or June if their renewal date remains October 1. Solicitors that are well managed, have a good claims history and a strong financial position – as well as complete and correct proposal forms – are more likely to stand out to underwriters and receive a competitive quote promptly.
On the other hand, solicitors with very complex business, a high frequency of claims and those who are heavily reliant on conveyancing work – which attracts the largest number of claims – are all likely to face higher premiums, or worse.
“The claims experience for the solicitor profession remains worse than any other,” said Jenny. “It seems unlikely we will see this changing in the near future.
“Solicitors continue to make the same routine errors that they have always made – particularly with reference to conveyancing work. In addition, the quantum of claims has increased considerably.”
“The volume of conveyancing transactions is also on the increase as the economy recovers and the claims frequency will inevitably increase as a result.
Solicitors continue to make the same routine errors that they have always made – particularly with reference to conveyancing work. In addition, the quantum of claims has increased considerably
Jenny Screech, Zurich’s Legal Professions Manager
“There is also a skills gap with fewer solicitors gaining good levels of experience in conveyancing and commercial work in the last five years – simply because the level of work has not been there. This will inevitably impact on the claims position adversely over the next few years.”
In addition, there is still a great deal of conjecture as to what the market dynamics will actually look like in 2014.
“There is the question of who will be able to offer insurance this year following the outcome of the consultation by the Solicitors Regulation Authority as to whether there should be a minimum ‘B’ rating requirement,” said Jenny. “A decision on this is expected prior to renewal.”
And then there are the Jackson reforms, which came into effect last year. Strict enforcement of the reforms is creating new problems for solicitors in terms of litigation work.
“Rating for litigation related areas of practice will need review as a result of this,” added Jenny.