Boehmer: Co-insurance trend
The market for professional indemnity insurance (PII) is likely to continue to worsen but future premium rises should not be at the average of 17% seen this autumn, a leading broker has predicted.
Lockton said co-insurance has emerged as a growing trend, with insurers looking to reduce the risks of an environment where the volume of claims against solicitors has not reduced but their size is increasing.
There was also a negative reaction to the Solicitors Regulation Authority’s (SRA) refusal to change the minimum terms and conditions of insurance, under which policies cannot be cancelled for non-payment of premiums or excesses.
Some 93% of the 660 Lockton clients renewing their cover for 1 October stayed with their existing insurer – although only 80% of the bigger firms of 26 or more partners – but saw an average premium increase of 17%.
The figure was 13% for practices that were claim free, and 27% for those with claims experience.
Premiums for the ‘working layer’ above the compulsory minimum jumped by 64%, with the bigger firms seeing the bigger rises.
The costs of the layers above £10m were up 22% per million of coverage. “This is purely down to the cost of capital increases that are being imposed by insurers,” said Lockton director Brian Boehmer.
Co-insurance has become more popular “as the severity of claims grows and insurers become increasingly cautious”.
Some 5% of Lockton’s clients were placed on a co-insured basis this autumn, especially for firms of 11 or more partners, and this trend is set to continue.
He explained that the insurance market had been hardening “well before” Covid-19 struck. “Extensive competition had suppressed rates for a prolonged period of time; arguably to unsustainable levels given the number of insurers that have exited from underwriting the class.
“Our understanding is that insurers simply have not been able to create a surplus of funds from the premiums collected to offset an uptick in adverse claims activity.”
Nonetheless, Mr Boehmer said other sectors, particularly the construction industry, had it worse than law firms.
As a direct result of the SRA’s decision on the minimum terms, “one of the leading and longest-serving providers of insurance solutions for the legal profession decided against writing any new business for the first time since the launch of the open market 20 years ago”.
Not only did this mean less choice for practices, Mr Boehmer said, it may have also had an impact on the behaviour of other insurers as it became more of a seller’s market.
Some insurers also asked owners to provide personal guarantees to meet both excess payments and their run-off obligation should their practices close. This received “a mixed response”, Mr Boehmer reported, with some preferring to pay more to an alternative insurer without such a condition.
Other changes in insurers’ underwriting appetite included a reduction in ceilings for perceived higher-risk practice areas, such as conveyancing and commercial work, with one major player introducing a maximum percentage of a firm’s business coming from conveyancing for new business enquiries.
Fears of an impending deep recession also meant a further fall in insurers offering policies lasting longer than a year.
Mr Boehmer said there was “no particular claims trend”, but buyer-funded and new-build developments were of particular concern, while break clauses in leases “are proving to be problematic for insurers” and could become even more so as businesses look to get out of leases in a post-Covid world.
The increasing complexity of families meant that wills and probate was another area where claims were on the rise.
Mr Boehmer said: “Sadly, we anticipate that insurance market conditions are likely to toughen before they improve. We would recommend that practices cautiously budget their forthcoming insurance spend as it is likely to become more expensive.
“We do not foresee rate increases being quite as dramatic as they have recently been, however, this may change if the severity of claims continues to rise and we also experience an increase in frequency due to the occurrence of recessionary losses.”
He said insurers were concerned about working from home or firms having a “fragmented workforce”.
“Maintaining quality control is key and governance and oversight of all associates regardless of position within the practice is paramount (this does mean all partners too).”
Mr Boehmer noted that, despite all the risk warnings regarding market conditions, a large percentage of practices started the renewal process “far too late”.
In Lockton’s sample, 69% of firms have been claim payment free in the last six years, rising to 86% for those that do not undertake conveyancing.
The best performing firms from a claims perspective were sole practitioners, 90% of whom have not had a claim payment in the last six years.
Lockton signed up 149 new clients this year whose figures were not included in the sample as it did not have comparable data for them.
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