The IUA is concerned that professional indemnity insurance could become “unsustainable” if underwriters cannot cancel policies if premiums go unpaid

The International Underwriting Association (IUA) is calling for the right to cancel professional indemnity insurance (PII) for solicitors in an open letter.

It published an open letter to solicitors highlighting that PII could become unsustainable if underwriters cannot cancel policies if the premium is not paid.

The IUA believes this should be the case particularly for cover that is in run-off but also it calls for the payment of excesses on a policy to be mandatory.

It has discussed the minimum terms and conditions these policies with the Solicitors Regulation Authority and has now set out its concerns in an open letter to the legal industry.

Chris Jones, director of legal and market services, at the IUA, said: “Many solicitor firms are facing economic pressures and we have already seen an increase in requests for payment of premiums by instalments.

“Insurers have shown their willingness to work with other professions that are struggling to mitigate the short-term economic effects of Covid-19, but the complete lack of any protection around payment of premium and excesses makes it far more difficult to do this for solicitors.”

The IUA has been engaging with the Solicitors regulation Authority (SRA) about concerns insurers had on the non-payment of premiums, policy excesses and the availability of cover that cannot be cancelled.

It follows the Law Society warning that Covid-19 and Brexit are pushing up PI rates in a market that was previously hardening. 

Limited progress

The letter was intended to raise awareness on the limited progress that has been made on this issue and the potential implications ahead with the upcoming renewals on 1 October.

The letter proposes the following changes to the SRA’s Minimum Terms and Conditions (MTC):

  • Allowing the policy to be cancelled in the event of non-payment of premium
  • Allowing the payment of run-off premium to be compulsory for such cover to incept
  • Allowing the payment of excesses to be made mandatory and, where not complied with, the ability to off-set excesses against claims payments

Urgent change 

The IUA argued the following to support the need for urgent change in its letter:

  •  Around 55% of 40 LLP Law firms with a combined revenue of £15bn have insufficient cash to cover one month’s expenses – something that the Covid-19 has exasperated.
  • The deteriorating economic climate could mean that credit risk taken on by insurers for non-payment of excesses and premium risks are commercially unacceptable levels and could lead to a restricted availability and affordability of PI.
  • Insurers are now seeing requests for an increase in the request for payment of premium by instalments. The IUA argues that this is “indicative of the economic pressures that many solicitors are facing”.
  • The lack of a right to offset claims payments with unpaid excesses and premium further agitates the negative impact of non-payment of premium on insurers.
  • The reporting process to the SRA where non-payment occurs has IUA suggests has not led to any tangible improvements for Insurers who continue to assume the increasing risks of non-payment. This is despite the disciplinary process for regulated firms
  • The situation at present is contrary to established contract and insurance law principles. It goes further than other regulated professions and the rules of the Financial Conduct Authority.

No amendments?

The letter also stated: “Ultimately, PI insurers could be on risk for seven years regardless of payment of premium or excess. This includes unlimited access to very broad Any One Claim cover in that period. From a prudential, professional standards and equity perspective this is unacceptable.

“We understand that amending the MTCs is not straightforward and can take time. Discussions with the SRA and the Law Society have ultimately led to a situation where there will be no amendments to the MTCs for the October 2020 renewals.”

The SRA are however undertaking measures to mitigate the non-payment issue in the short term such as reviewing its supervision and enforcement processes and effective communications with regulated firms.

Although IUA welcomes these steps it said it will do “little to address the core concerns of Insurers and the likely effect of those concerns at forthcoming renewals”.

Higher cost, less choice

Without these measures in place IUA said that it is likely that insurers could become more selective in the risks they accept and smaller conveyancing firms that generate lower premiums.

As a result, they could face restricted choice and higher costs for professional indemnity cover.

“It is not proposed that there should be any change in the scope of insurance offered. Our objective is to better manage policies to ensure that solicitors pay for the cover that is being provided to them. This will benefit the market by providing long term confidence in the availability of cover and giving insurers more flexibility to develop bespoke arrangements for their clients,” said Jones.

Renewals impact?

Meanwhile the credit risk posed for insurers by the lack of cancellation rights for premiums that are not paid, IUA warns could lead to the provision of a compulsory six years of run-off cover for nil premium.

But this is not seen in any other regulated profession. The rules at present are contrary to the established contract and insurance law principles, and they not required by the Financial Conduct Authority or any other regulators with an enhanced consumer protection.

The SRA is therefore attempting to mitigate the issue in the short term by reviewing its processes for supervision and enforcement.

Although these efforts are welcome, they do not fundamentally address the core concerns of insurers.

Instead they are unlikely to have an impact on the upcoming renewals season in October and thereafter.

The letter added: “This may well disproportionately affect smaller conveyancing firms, who generate much lower premium and may be especially impacted by Covid-19 and the lack of ‘high-street’ business. As the vast majority of firms fall within this bracket, the overall impact could be widespread.

IUA’s primary objective is to better manage policy mechanisms – this is to ensure that solicitors pay for the cover that is being provided to them. This it said would benefit most firms as insurers would be able to better evaluate and price their existing and future portfolios as well as provide a significant degree of confidence for longer-term ability to this cover provide to solicitors.

In addition to this, greater protections for insurers around excess payments will give them more confidence and create greater flexibility in their insurance terms with the advantage of higher excesses in return for lower premiums. But the current lack of protection stifles product innovation.

“Our continuing goal is to provide ensure that there is sufficient and affordable PII capacity available for regulated firms at a time when it needs it most,” the letter concluded.

Read more…Briefing: Looking back at the history of problems in the solicitors PI market 

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