PII Focus | The broker's perspective: 'fail to prepare and prepare to fail'

Many have seen a significant drop in fee income as a result of the continuing economic difficulties and the introduction of the Jackson reforms, legal aid changes and changes in the regulatory framework have all presented significant issues.

We are now approaching another professional indemnity renewal "season" where thousands of law firms look to renew their policy on a common renewal date - 1 October.

So what can we expect this year? What are the key issues that solicitors will face and how can they best respond to these issues to ensure they optimise their insurance placement for another year?

Framework changes

There are a number of fundamental changes to professional indemnity insurance (PII) for solicitors in 2013. The closure of the Assigned Risks Pool (ARP) has, for the first time, enabled insurers and brokers the ability to offer terms that can include a change of renewal date.

As insurers and regulators no longer need to calculate insurers' proportional liability for losses in the ARP, this removes the need for a common renewal date. If insurers agree to offer an alternative renewal date, it is possible that they will offer longer term policies rather than a period of twelve months (or part thereof).

The removal of the ARP has resulted in the introduction of an Extended Indemnity Period (EIP). Firms that are unable to obtain PII cover will now receive automatic cover for an extended period of thirty days' during which they will need to obtain cover elsewhere. If they are unsuccessful, they then enter a period of 60 days' where they are no longer allowed to accept new instructions and must prepare for an orderly closure. The existing insurer will then have to provide six years' run-off cover (whether or not the firm can pay the premium).

Prudent insurers are making provision for any of their insured firms that end up in such circumstances and are reviewing the affect the EIP will have on them when considering quoting to prospective clients.

Insurer security ratings

The issue of insurer solvency should be one of the most important considerations for most law firms. Past insurer insolvencies and cessations following regulatory intervention have highlighted the increased risk associated with unrated security. In a nutshell, unrated security means that the insurer has no formal independent assessment of its financial strength.

It should be remembered that the SRA do not vet insurers and they have changed the status of insurers from "Qualifying Insurers" to "Participating Insurers" in recent months to show that they have not performed any objective entry requirements over and above the participating insurer agreement.

Few, if any, larger firms risk placing their PII with unrated security but many smaller practices have been affected by this security issue as they have historically been attracted by the lower premiums offered. It will be interesting to see whether this practice continues this year or whether law firms of all sizes look for insurer stability.

Financial stability

It is clear that insurers are looking closer at firms' financial robustness before offering quotations. No insurer wants to be left holding the baby following the sudden forced closure of a firm where they have to provide six years' run-off cover with little or no prospect of receiving reimbursement for taking on the additional risk arising from legacy claims.

Firms should expect insurers to ask more questions in this area and will be well placed if they prepare brief financial statements demonstrating their controls in funding, cash-flow, assets, liabilities, drawings etc.

Current market conditions

The good news is that there are insurers that are looking for new business; insurers with a recognised security rating and an understanding of the issues faced by solicitors.

There are often conflicting views from insurers and brokers depending upon their own experiences. Insurers and brokers often have different perspectives that reflect their clients own experience in relation to buying insurance, such as the cost of the premium, coverage offered and the claims record.

Insurers will focus on the cost of the insurance relative to the risks they are taking and will assess their business on profitability. Brokers' viewpoints will reflect their ability to either access a wide-range of insurers, or whether they have restricted access to only one or a small number of insurers.

On a brighter note, it is fair to say that the number of claims being notified is falling which can only help encourage insurers to write solicitors PII. The main area of concern remains conveyancing matters. However, limitation will now start to improve matters although there is the increased risk of a notification spike just before limitation kicks in as clients look to defend their positions. Insurers are paying out some large claims but it is fair to say that the general market conditions are improving.

Fail to prepare

If law firms prepare early, work closely with a recognised specialist broker and put in place a renewal plan with that broker, there is every chance they can relax this year in the knowledge that the chance of becoming one of the first to try out the EIP has been greatly reduced.