The solicitors’ professional indemnity market could be heading for major losses as rates continue to fall. Tom Flack and Sarah Kennedy report
?The annual scramble for solicitors’ professional indemnity (PI) business is entering its final month. But as insurers slug it out for market share, there are warnings that rates are too low and the sector could be heading for huge losses.
For many months, insurers have been talking up the perceived boom in the solicitors’ PI market. And with 9,000 law firms in England and Wales alone – many of them growing their businesses – it is easy to see why.
Judging from the ongoing stagnation of rates and premiums, however, it is becoming increasingly difficult to see how insurers will make money.
There are essentially two markets – one is stable, the other cut-throat. The former comprises the top 100 law firms, the latter the remaining 8,900. Most insurers are targeting the bottom end of the market.
Sandra Neilson-Moore, European practice leader for law firms’ PI at Marsh, explains: “At the top end, there is much greater stability, with larger firms wanting to stay with their existing arrangements. But at the volume end, there has been a feeding frenzy.
“Only at the upper end are insurers making good margins with good underwriting results. That could change: if the economy takes a downturn, inflated claims will follow as firms attempt to recoup their losses.”
Former solicitors’ PI giant Hiscox has already shown its willingness to walk away from the market, complaining that rates do not accurately reflect the risk.
Experts predict that the situation will get worse before it gets better. Frank Maher of Legal Risk, predicts rates – described as rock bottom by the majority of commentators – will not budge come the approaching 1 October renewal deadline.
During last year’s renewal season, solicitors’ PI premium fell by nearly 15%. In effect, with gross fees for law firms rising, this could mean another hit for insurers.
Maher says that, despite the lack of profitability in the solicitors’ PI market, the top six insurers in the market – Zurich, QBE, St Paul, Royal & SunAlliance, AIG and Norwich Union – are likely to maintain a strong presence.
He says: “They all think they have the magic formula. I find it difficult to see how it can be profitable in the long run. It can take up to five years for losses to emerge. And cases are complex. They can take two to three years to be resolved.”
Neilson-Moore adds: “We don’t know if [insurers] are making money. It’s a long-tail cycle.”
Aon believes the market could become even more volatile for insurers, with Nicholas Gilbert, the broker’s professional services group director, predicting the solicitors’ PI assigned risk pool will drop to below £200m.
In 2000, when the solicitors’ indemnity fund was opened to the market, the pooled amount was £250m.
“One reason insurers have been able to keep premiums [relatively] stable is that claims in the UK have been low
Christine Bohner, Zurich
Some experts say that in order to accurately reflect the risk, the total premium should be between £400m to £500m.
Hiscox, however, decided to buck the market trend and raise PI rates. The move has cost the insurer about £300,000 worth of business and plunged its market share from 8% to 0.1%. But Hiscox is holding firm – even if that means letting existing clients walk.
The insurer currently underwrites PI for about 160 law firms. Whether it will retain those numbers come 1 October remains to be seen.
In contrast Royal & SunAlliance (R&SA) argues, like all insurers, there is money to be made in solicitors’ PI if handled correctly. The company says it writes its business on a bespoke basis to ensure adequate rates and is eager to take on more clients.
In 2006, R&SA had £17m or 7.9% of the solicitors’ PI market. When the company purchased Martello, this figure rose to more than 11%.
Zurich, the market leader at 20%, also plans to stand its ground in the market and will not be raising premiums this year. But Christine Bohner, head of Zurich professional, admits the company feels rates are as low as they can go. “We think rates need to go up.”
It is a sentiment echoed resoundingly across the market. The reality, however, is that rates will either continue to fall, or remain stable.
Bohner explains: “One reason insurers have been able to keep premiums [relatively] stable is that claims in the UK have been low.”
If rates were to dip even lower, some insurers would have to make the difficult decision of whether to stay in the market.
But Gilbert says if insurers are running the risk of reduced rates in the solicitors’ PI market, larger brokers are reaping the benefits.
“The market is still competitive. There are lots of brokers chasing lots of business, but there is profit on the fees we’re earning. Brokers, unlike insurers, won’t find in three or four years that 2005 cost them an arm and a leg.”
Despite their concerns, experts predict there is not likely to be a big shake-up with solicitors’ PI until a big claim hits the market, or one of the top six insurers pulls out.
Maher says that only then will you see insurers getting choosier and starting to look at a firm’s risk management.
Neilson-Moore concludes: “I don’t blame insurers for being worried. If circumstances conspire against them, some could end up in a terrible state.”
Solicitorsâ€™ PI in numbers
Â£210m current solicitorsâ€™ PI total premium
20% Zurichâ€™s share of the market
11% Royal & SunAllianceâ€™s share of the market
9,000 number of law firms in the the number of law firms that have fewer than five partners
15% the amount premiums have fallen in the past year
1.75% solicitorsâ€™ share of UK GDP
90% the number of law firms that have fewer than five partners