With solicitors’ claims rising on a month-by-month basis, insurers are increasingly selective about who they offer professional indemnity to. Andrew Wragg looks at how key sector players are responding to what is a direct consequence of the downturn.
According to The Law Society, solicitors remain calm about the prospect of rate hikes on their professional indemnity policies during renewals season. But is this just false optimism or will the damage be less than forecast?
Zurich has announced that solicitors’ PI rates across its £42m book of business could increase by as much as 20% over the next three months, with further increases likely in 2009. However, the largest insurer in the sector – which quotes over 50% of the entire market each year and has over 2,000 clients – maintains that each account would be scrutinised on an individual basis.
“If we looked at our portfolio as a whole and said that every single practice out there needed a 10% rate increase, we would likely lose good performers and retain bad ones,” says Stuart Quinlan, head of financial lines at Zurich’s UKGI broker division.
“We have undertaken an amazing amount of actuarial work over the past few months in order to reach our pricing conclusions.”
Quinlan says solicitors’ claims are increasing on a month-on-month basis, not just in conveyancing – which typically witnesses the most claims due to the sheer number of transactions taking place – but also in other areas of solicitors’ practices.
Growth in property
“The state of the economy is the main factor contributing to the increase in claims,”
he adds. “The growth in the property market over the past few years has probably masked poor lending practises and lax procedures by some of the solicitors out there.”
Sources claim that Zurich is being “very particular” in its choice of clients. However, in contrast to RSA, which has stopped adding practices of less than three professionals to its books, and Novae, which is rumoured to be exiting the primary layer due to an influx of claims, Zurich is continuing to insure the gamut, from sole practitioners to top 100 firms. Indeed, it is still looking to grow its book of business, as long as it is “the right new business”.
“We are not retrenching and pulling away from any particular size of firm,” Quinlan told Insurance Times.
“Zurich is not in the habit of pulling out of markets – we are in this for the long term but prices need to be sustainable.”
The company began quoting for 2008-2009 solicitors’ PI cover on Monday and – in an attempt to limit its exposures to bad risks – has distributed conveyancing questionnaires to practices, to drill down into their business procedures.
In common with many of the sector’s main players, Zurich believes solicitors’ PI is underpriced. Along with the other PI protaganists, such as AIG, Travelers and QBE, it is having to compete with cut-price quotes from the likes of Quinn Direct, which saw rapid growth in business last year in the one- to three-practitioner bracket. Quinn’s market share could increase further this year – when times are tough, solicitors may be tempted by these very cheap prices.
“Three months ago, I would have said that rates will be going down but the market is evolving
Quinn now writes a sizeable solicitors’ PI book, after scooping the majority of the 800 clients discarded by QBE last year, according to one broker.
Hamish McNair, chairman of the Solicitor Sole Practitioners Group – whose members each organise their own policies but are recommended to Quinn through broker Prime Professions – said that run-off cover was an attractive part of the Quinn offering.
“Run-off cover is part of the [Solicitors Regulation Authority] Minimum Terms and Conditions but different insurers offer it at different rates, generally at a multiple of last year’s premium,” he says. “But Quinn offers free run-off cover for two to three years, which is a big selling point.”
Quinn’s recent decision to withdraw from Moody’s credit ratings has, understandably, left the market with mixed feelings. Quinn says it made the move because there was little chance of the company receiving an upgrade this year. It reassured clients that it had no debt in issue and so the rating was superfluous. But as one solicitor says: “The question is, will brokers and solicitors be prepared to work with Quinn now that it lacks a financial strength rating?”
Bonds over shares
The picture doesn’t look too rosy: Quinn’s investment income fell from €155m?(£123m) in 2006, to €84m (£66.5m) in 2007. According to the Irish financial regulator, at the end of 2006, 56% of Quinn Direct’s assets comprised property and stocks, while just 6% were government securities. This balance is unusual: insurers generally favour bonds over shares due to the decreased downside risk. Given the current state of the economy and the plummeting stock markets, further falls in investment income should be expected this year.
Quinn currently holds considerable sway over solicitors’ PI rates and its two-year deals through Prime suggest the company has been thinking longer term.
“Three months ago, I would have said that rates will be going down but the market is evolving every day,” says one intermediary.
“Now the only thing that can drive rates down is Quinn but if Quinn disappears, rates would go soaring.”
Soft market conditions resulted in solicitors’ PI premium income falling from £245m in 2003 to £200m last year while current rates are considered unsustainable given the potential level of exposure for the industry. Uncertainty over the fallout from deteriorating economic conditions – and specific factors such as mortgage fraud – are making insurers even more wary. Norwich Union has warned that the current economic downturn is “the most serious threat to solicitors’ PI insurers since the primary covers came back into the open market in 2000,” (see box).
Steve Holland, of broker Lockton, believes that it will be 2009, not 2008, that will test the mettle of the market.
“Globally, there is around $9bn (£4.5bn) exposure to sub-prime on the directors’ and officers’ side, and it could be 18 months before this spreads through to the PI arena,” he says.
“Solicitors who drafted the collaterised debt obligations, or advised on the contracts, could find themselves targeted. There may be exposures, and it is likely to be the larger law firms rather than the high street practices that are affected most.”
The solicitors perspective
Andrew Holroyd, president of The Law Society, says: While the professional indemnity insurance market remains soft there is the possibility it could harden. I do not believe that the market is at the point where firms need to start panicking.
While there has been talk of a similar scenario to the early 1990s occurring, the difference now is that the profession has access to tools such as The Law Societys Lexcel practice management framework and client-care guides to make them less susceptible to claims.
Ã¢â‚¬Å“Despite moves by some professional indemnity insurers to withdraw products from the legal services market, there remains a substantial number of insurers offering PI to solicitors. This has ensured the market remains competitive.
The Law Society has arrangements in place to ensure that all solicitors have access to insurance. Should difficulties arise in the PI market in future, we will review the situation again.