Professional indemnity premiums for solicitors are showing ‘true signs of stabilising’, according to broker

The professional indemnity (PI) insurance market for solicitors is experiencing positive momentum around annual renewals as rating levels are stabilising and new insurer entrants are creating healthy competition between current carriers, according to broker Miller Insurance.

Its review of October renewals in the solicitors’ PI market showed that there are a range of positives for the beleaguered sector, which has suffered from a capacity squeeze and a volatile rating environment so far this year.

The broker stated: “During the October renewal period, we saw a shift in attitude from insurers, with many showing a greater appetite to grow and a willingness to consider and engage [with] the right firms.

“Insurers remain extremely selective, however, so [law] firms need to present themselves in a positive way.

“Many clients were offered terms at the same premium as expiry, despite the general inflationary environment, and early renewal offers were also made to clients [that] met certain underwriting criteria - a welcome return for clients [that] had, pre-pandemic, enjoyed this opportunity for many years.”

Miller added that the October renewal period provided “measured relief” from the extreme pricing pressure endured by some law firms in recent years, where it was not uncommon for premiums to increase by more than 20%.

“[While] rate decreases were rare for clients, rate increases [have been] much less severe and showed true signs of stabilising,” the broker continued.

“Insurers were more open to negotiation and many were receptive to considering new business opportunities. In fact, several were looking to grow their existing portfolio.”

Where insurers had previously been pulling back their support of the solicitors’ PI market in the last two years, this resultant lack of choice led to many law firms renewing with their incumbent insurer.

However, Miller Insurance expects to see increased carrier choice in the not too distant future - as the market softens and more insurers look to grow their portfolios, law firms should start to enjoy a stability that has been missing in recent years.

Claims risk

Conveyancing continues to cause the highest number of claims in the legal PI market, the broker added, meaning that this field of law remains a concern for insurers - particularly as the UK is now entering a recession with rising interest rates increasing the chances of mortgage and loan defaults.

The broker noted, however, that the anticipated fallout from the Covid-19 pandemic has not yet materialised - it remains to be seen whether the anticipated claims around pandemic home working and the resultant lack of supervision and risk management controls actually come to fruition.

A major growth area for claims in the solicitors’ PI sector has been ancillary relief associated with alleged under settlements in divorce cases, particularly related to the alleged entitlement to a spouse’s pensions.

Financial focus

Miller Insurance added that a law firm’s financial health remains a significant underwriting consideration for insurers.

“The Solicitors Regulation Authority’s (SRA) minimum terms and conditions mandate, [applicable for] any insurer that signs up to the Participating Insurer Agreement, [requires] that [insurers] have to offer a six-year run off period in the event that a firm ceases during the policy period,” the report explained.

“Consequently, when underwriters are considering risks, they need to ensure that firms can not only meet their immediate liabilities, but must also look ahead and make an educated guess of the financial security of the firm going forwards.

“Insurers charge an additional premium to cover this risk, which is a percentage of the annual premium - however, should a firm become insolvent, the six-year run off period has to be provided irrespective of whether payment is received.

“Certain insurers specifically raised this point with the SRA, but no compromise was reached. To address this risk, some insurers introduced the use of personal guarantees, which has been met with mixed responses from the profession.”

Miller Insurance warned, however, that “demonstrating strong financials may be particularly challenging for startups or teams leaving established firms to start up on their own”.

It continued: “We are seeing an increase in firms backed by third party litigation funders and this requires a full explanation to provide adequate comfort to insurers, including details of any repayment terms.

“A key consideration for underwriters is whether any loans or funding could be called, resulting in firms facing financial difficulties in terms of cash flow and meeting liabilities in the short or long term.”