Law Society rules requiring higher indemnity levels could push rates up. Andrew Holt reports
Over half the solicitors in England and Wales are expecting professional indemnity (PI) rates to rise for the 2005/6 insurance year according to recent research carried out by Zurich Professional.
An average increase of 13% is predicted by solicitors who took part in the survey: one third expect rises of up to 10%, while one in 10 foresees a 20% increase. Jeremy Alwyn, sales and operations director for Zurich Professional, says the research confirms the market is fundamentally under-priced.
"Solicitor PI premiums are still below the levels of the final year of SIF [Solicitors' Indemnity Fund], and the market as a whole needs to go up by about 15%. This is in keeping with what the solicitors themselves predict. However, it is still too early to say for certain how much the market will rise as very few insurers are providing terms at present," says Alwyn.
Tough competition since SIF has kept prices relatively low, with a number of players moving in and out of the market. Unable to sustain a long-term market position, these insurers have offered solicitors a purely price-based proposition, with less focus on claims handling and risk management.
Zurich says that the market has matured considerably over the past few years and that solicitors are beginning to favour long-term, quality relationships with insurers over a short-term, cheaper deal.
If there were no other factors, PI premiums would at least have to rise at the rate of inflation. However, there are several issues contributing to potentially one of the toughest renewal markets since SIF, the insurer argues.
Principally, as a result of a change in the Law Society's minimum terms and conditions, the profession now has to purchase a much higher minimum level of indemnity.
Huge impact
Sole practitioners and partnerships are now required to have £2m cover rather than £1m. Recognised bodies including limited liability partnerships and incorporated practices will be required to purchase a minimum of £3m cover. This will have a huge impact on the bulk of the solicitor market. Zurich Professional estimates that only about half of solicitors firms purchased more than last year's minimum cover.
"No matter how small a solicitor firm is or the type of work it does, providing £2m worth of cover as opposed to £1m equals more risk and greater costs for insurers which will push up the price accordingly," states Alwyn.
"It will, of course, depend on the size of the firm as to how much extra needs to be paid. Most will look at around 20% for the additional £1m, but some could be looking at as little as 10%."
Doubling the indemnity level could be viewed as long overdue - it has been at least 20 years since it was last changed. The new minimum level reflects the growth in the inherent value of modern solicitors' work.
Today solicitors are dealing with increasingly complex, high value matters in a more litigious society, so it's inevitable that the overall cost of claims brought against them will be significantly higher than in previous years.
Rising claims, particularly in relation to residential conveyancing and personal injury litigation, made up over half of all PI claims notified to Zurich last year.
Zurich found that during 2004 over 35% of claims notified were for residential conveyancing, arising mainly from not conducting adequate investigations into the title of the property and not identifying and dealing with all the mortgages and other encumbrances affecting the property.
"The recent housing boom and increase in competition to win business may have pressurised solicitors into dropping rates and accelerating time frames in order to compete, increasing the potential for cutting corners and making mistakes," says Andrew Nickels, risk manager for Zurich Professional.
Personal injury claims increased by over 60% in 2004 compared with 2003, largely due to issues relating to claims management firms.
Prominent were claims arising from solicitors' involvement in The Accident Group (TAG), with after-the-event insurers making claims against panel firms due to alleged errors in assessing the risks when taking on personal injury 'no-win, no-fee' cases.
There is a worry that firms are entering fields without the relevant expertise. In private client work, for example, higher property values bring a significantly larger proportion of the population into potential inheritance tax liabilities. "This is a complex, technical area and a lack of expertise will inevitably lead to claims, many of which we can expect to be substantial," explains Nickels.
Preventable mistakes
"In the past five years, we have not seen a significant change from the SIF claims experience. And what concerns us is that from a risk perspective many claims are still arising from the same preventable mistakes.
"We are therefore urging solicitors to review their systems and processes to make sure they have the right risk management controls in place," says Nickels.
Many solicitors only renew their policies in the last week of September. Those that renew early tend to attract the best deals and they are also often the firms with a demonstrable commitment to risk management with the good claims record to go with it.
"Some firms still do not appreciate the link between a bad claims record and their PI premiums - they have the unrealistic expectation that the price of their PI policy will remain the same," says Nickels. IT
