Insurers were exiting or reducing their capacity in the ‘unprofitable’ market, says the firm
At least 37 law firms had to close in the 12 months preceding 30 June 2022 due to the rapidly increasing costs of professional indemnity (PI) insurance.
During the three month period between 1 July and 6 October 2022, a further nine firms closed.
This is according to Hazlewoods, a chartered accountant and business advisory firm that specialise in the legal profession.
PI premiums now represent around 5% of the average law firm’s expenses – however, for firms that specialise in conveyancing, PI can make up as much as 20% of their turnover from premiums.
Insurers regard firms that make more than 25% of their revenue from conveyancing work as higher risk from professional negligence claims and charge higher premiums to compensate.
However, Hazlewoods said that premiums are also rising because of the significant volume of claims in this area at present.
Exacerbating this is the number of insurers reducing their capacity in – or completely exiting – the lawyers’ PI market, which has been seen as largely unprofitable.
Law firms use PI insurance to pay for the costs of professional negligence claims by customers and PI premiums have become one of the biggest expenses for these businesses, according to Hazlewoods.
Despite the firm’s warning based on its data for the period running up to October last year, in December broker Miller Insurance said that rating levels in this market were stabilising and new insurer entrants were creating competition between carriers.
Ian Johnson, associate partner at Hazlewoods, said: “The cost of insurance is becoming an increasing problem for law firms.
“This is particularly the case for smaller law firms who may not have the same risk management processes as large law firms and ones focused on conveyancing or other higher risk areas.
“With the number of insurers in the market shrinking and those still left increasingly risk averse, premiums could continue to rise.”
Johnson added that firms should prepare for a continued rise in premiums over the coming months and ensure they can fund essential PI cover.