Insurers’ withdrawal from market leads to higher rates and enlarged risks pool.

Law firms faced a frantic rush to renew their professional indemnity (PI) insurance ahead of yesterday’s 1 October deadline.

Capacity in the market has reduced, which could mean hundreds of firms did not obtain PI cover before the deadline and will be forced to enter the assigned risks pool (ARP), according to one broker.

Insurers have withdrawn from the market or sought to price themselves out of competition in recent months because solicitors face increased claims linked to the economic downturn, making them a much higher risk.

RSA has stopped writing new business for one and two-person firms; Novae has stopped writing primary layer PI and Norwich Union has stopped writing business for firms with fewer than 10 partners if the firm carries out conveyancing work.

For those insurers that are still writing business, rates are expected to rise by as much as 10%.

Simon Lovat, divisional director of the UK professional indemnity division of United Insurance Brokers, said: “The number of companies going into the ARP is going to be significantly higher than in previous years. We are estimating in the hundreds, whereas last year there were about a dozen.”

The ARP insures firms that cannot get cover from qualifying insurers or cannot afford the terms available to them.

The cover is underwritten by the qualifying insurers in the same proportion as their share of the premium income from compulsory cover for the relevant period of time. But firms in the ARP face huge premiums.

Tony Blyfield, chief executive of PI broker Prime Professions, said: “In the past there has been a remarkably low level of firms in the ARP. The market found one way or another to accommodate them.

“This year a lot of insurers at the bottom end just aren’t there. Firms that went through the process earlier will generally be OK, but those that left it late will be struggling to find something.”

Industry sources identified Quinn as one insurer whose attractive rates have helped it win business at the volume end of the market.

At AIG, the US government bail-out has restored some confidence in the beleaguered insurer. Blyfield said: “Most people felt at that point they were being underwritten by the US government and their view changed overnight.”