How to get PII cover with rated insurers?

Reading the news that Latvian professional indemnity (PI) insurer, Balva had its licence suspended felt like Groundhog Day. Yet again the spectre of the unrated PI insurer raised its ?ugly head.

Last year Balva was a late entrant into the market writing around £16.5m of PI business (c. 7 per cent of the market), making it the eighth largest solicitor PI insurer. It targeted mainly smaller firms (one-four partners), writing for market share by undercutting the competition on price. And - surprise, surprise - the firms seduced by Balva's offer now find themselves caught in an 'unrated insurer' trap. If the SRA determine that there has been an "insolvency event" these firms will face the difficult prospect of finding a new PI insurer three-quarters of the way through their policy year, or having to go into the Assigned Risk Pool (ARP) where they will be forced to pay punitive ?ARP rates.

Over the last three years a number of insurance companies without financial security rating have appeared on the Solicitors Regulatory Authority (SRA) Qualifying Insurer (QI) panel including Lemma, ERIC and now Balva. All of them have either withdrawn from the market, had their licences to write business withdrawn or have gone into administration. This ongoing saga has left many firms of solicitors facing a very bleak future, or no future at all.

The unrated insurer problem particularly affects the smaller, high street firms as, due to the risk associated with the work they undertake, they are not deemed attractive to financially secure QIs. This situation leaves them with little or no option but to use unrated insurers.

At the end of June the SRA agreed to consider banning unrated insurers, but it will not make a decision on this before a full review has been undertaken, and the review will not be completed until 2014. So firms will need to carefully weigh up the risks versus reward of using unrated insurers for this year's PI renewal.

So what can firms with a Balva policy do in the short-term? Firms with Balva policies have been given the option to transfer their policy to a German unrated insurer, Berliner Versicherung Aktiengesellschaft (Berliner), which is offering to take on the Balva policies for four months from 1 June 2013, without the need for additional premium. This is a stop gap option which is worth considering. However, it comes with a caveat, as according to its accounts Berliner only has around €6m in capital reserves. So unless you have researched the market and fully weighed-up your options, do not feel pressurised into extending your policy with Berliner post the October 2013 renewal date - as you could be jumping out of the frying pan and into the fire - and you risk ending up in a similar situation this time next year.

Improving your chances

Ideally, the goal should be to find a financially-rated QI prepared to provide cover through to the October renewal and beyond. So what can firms do to improve their chances of this happening?

Start preparing now for this year's October renewal. There are no guarantees that rated QI's will be prepared to offer your practice PII, as they are free to cherry pick the business they want. But you can help your case by making sure your paperwork and systems and processes are all in order. You will also need to find an experienced insurance broker to help with your renewal preparations, and sell you effectively to insurers.

Buying PII should run much deeper than an annual conversation with underwriters and completing complex forms. To have a chance of getting PII at an affordable price from a financially-rated QI you need to be able to demonstrate practical, effective management and compliance with industry regulation.

Checklist

What information do insurers need? Comprehensive claims data is fundamental to the underwriting process, and so it is important that underwriters have as much information as is necessary to assess the circumstances that has resulted in a claim. They will want to understand why it happened, and more importantly what has been done to prevent a reoccurrence.

QIs typically will want to view a firm's claims history over a six-year period however, some markets, particularly in the excess layers, will take into account claims stretching back as far as ten years. Insurers not only look at the settlement value of payments, but will also factor in any reserves that have been set.

The Maximum Potential Loss (MPL) figure often shown in the claim summaries issued by insurers are not used directly in the calculation of premium, however a large MPL may trigger further questions to help underwriters understand what the claim is about and how defendable it is. Insurers often refer to what is known as the 'incurred position', which is the total cost of a claim. This will include the costs of defence when a matter has been referred to a 'panel solicitor', usually due to the size or complexity of the claim.

Insurers will want to see reports following visits or investigations from the SRA or SDT to establish if there are any particular issues or systemic failings in the business. If any restrictions have been placed on practising certificate they will want to know how you are supervising the person to ensure that the restriction is met.

The financial health of a practice will also be considered, and insurers will look at profitability and net worth. If more than 20 per cent of your firm's income is reliant on one client or source of business, insurers will want to know.

Your firm's previous insurance history will be considered, as if you frequently move insurers you are less likely to be viewed as an attractive risk.

QIs will want to know the future plans of the firm, including a merger or acquisition. They need to understand how the business profile will change, and what due diligence has been undertaken, particularly if a merger or acquisition has created a 'successor practice' which is responsible for legacy liabilities.

Showing proper risk management is important. Quality marks and accreditations such as Lexcel and the CQS are viewed positively by QIs. They will want to understand the culture of your firm, and how systems and procedures are implemented by staff. Evidence that lessons have been learnt post a complaint or claim, and that systems have been amended to prevent a reoccurrence of a similar issue will be required.

You will need to be able to demonstrate how you are meeting outcome focused-egulation (OFR) requirements. In particular the management of your business rule 7.8 which requires firms to state how they manage their business and check quality of work.

PII renewals are hard work, and for many firms it is not a smooth process. But with the right broker on hand to assist, well-run firms with a good track record who can demonstrate robust, well-documented risk management procedures and systems should be able to find a financially rated QI, with which they can partner for the long-term. It may cost more in the short-term, but in the long-run it will be a worthwhile investment.