PII: Typical premium rate was 3-9% of turnover
Smaller law firms and practices that mainly operate in conveyancing pay twice the level of professional indemnity insurance (PII) premium of others, new research has shown.
The study commissioned by the Legal Services Board (LSB) and Solicitors Regulation Authority found that, overall, PII premiums were typically between 3% and 9% of annual turnover, with a median figure of 5%.
For 80% of the law firms studied, the premium rate was less than 10% of turnover; of the firms paying a higher rate than this, 90% were smaller firms. Of the firms with a premium rate more than 20%, their median turnover was £50,000.
The oversight regulator committed last year to investigating financial protection for consumers in the wake of the hardening PII market in 2021, which led to a sharp rise in premiums and higher excess fees.
As part of this, the LSB and SRA jointly commissioned Frontier Economics to analyse the factors that drove variation in PII premiums. It surveyed 280 SRA-regulated law firms and 17 law firms supervised by CILEx Regulation.
“We found smaller law firms pay a higher premium rate as a percentage of their turnover than larger firms, all other things being equal,” Frontier said.
“Our modelling of the data found that firms with a turnover of £765,000 were likely to be paying twice the premium rate as a percentage, when compared to larger law firms with a turnover of £3.2m doing the same work.”
Possible reasons for this included the relative sophistication of cyber and wider security arrangements among larger firms and their “relative ability to absorb losses or to recompense clients from other work”.
Insurers may also have “more of an incentive to maintain the business of larger law firms by keeping premiums low” and were potentially more open to developing bespoke arrangements the higher the overall fee a firm was paying.
Area of work was also a key factor. Property work typically attracted higher PII premiums equivalent to 8-12% of turnover – this meant the average £900 legal cost for a property transaction included £70-£120 to cover the PII.
“All other things being equal, law firms doing 60% of their work in property would pay a 50% higher premium rate than a law firm doing 30% (which our data suggests is the median amount across all firms).”
Law firms doing more work in litigation, corporate law and wills, trusts and probate also paid higher premium rates, although the impact was only about a quarter to a third of that for property work. Firms doing legal aid and employment work paid less.
Other factors which may contribute to a firm being charged a higher rate included holding more or variable amounts of client money, any history of regulatory findings (but not complaints history), more fee-earners and more qualified fee-earners per unit turnover.
Firms with 50% more fee earners than the median amount (for the same amount of turnover) paid a 10% higher premium, and a 14% higher premium rate if three-quarters of those fee-earners were qualified, compared to half being qualified.
Frontier said: “We heard that a small volume of work per fee-earner may be interpreted as a higher-risk operation, for example indicating higher risk of losses and higher risk of non-payment of premiums if the firm goes out of business.
“On the other hand, we would also have expected that having more qualified staff as a proportion of turnover would reduce risk, by improving the amount of supervision/oversight of risk, which would have produced the opposite result to what we observe. So this is inconclusive.”
Researchers found “no conclusive evidence” of a link between premium rates and either an individual law firm’s claims history or how late it left renewal (only 30% of firms had their insurance renewal confirmed at least four weeks before the deadline), although they warned that this may be due to limited data.
Law firms with separate cyber insurance tended to pay a higher premium rate as well. As the SRA already requires all PII policies to cover third-party losses resulting from a cyber-attack, this finding could be because of “the wider risk profile of firms typically taking out such policies, rather than any direct link to the cover itself”.
CILEx law firms paid 12% lower premium rates on average, although the data was not especially robust.
Frontier said that, while the pressures on PII costs from a hardening market cycle might begin to ease, costs were not expected to fall in the near term. This could impact prices charged to consumers and it suggested this as an area for further research.
As we reported last month, the LSB said the findings indicated that the one-size-fits-all approach to PII “may not be the most appropriate”.
Its next step is to put together a paper “setting out insight and options for the legal services regulators to take into account, when they consider the PII arrangements for their regulated communities”.
This could include other models they could use, such as practice area-specific mutual funds and encouraging the use of third-party managed accounts, although Frontier noted that anecdotal evidence suggested the latter were not currently seen by insurers as a reason to reduce premiums.
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