PII is broke and now is the time to fix it

Over the last few years, the process of renewing professional indemnity insurance has given many law firms cause for real concern and many partners to have sleepless nights. They have not only seen costs increase, but also insurers moving the goal posts in relation to the size of firms and types of work they will cover.

Closed doors

To try and bring some stability to the market the Solicitors Regulation Authority (SRA) last year introduced a number of changes, including the removal of the common renewal date and the assigned risk pool (ARP). But, with the removal of the ARP and the tightening insurance market generally, over 100 firms were forced to close their doors due to not being able to secure cover within the SRA’s new timescales.

To add to all of these issues, there have been several well-publicised collapses of unrated insurers, including Quinn, Balva and Lemma, which has led to further concerns for partners at firms insured by this sector of the market. Added to these firms’ woes, the SRA announced a review of the provision of cover by unrated insurers, leading to concerns that around 2,500 firms could face issues getting insurance from the rated market if it was concluded that the unrated insurers should be removed from the legal market.

A number of unrated insurers raised their own concerns that their applications for rated status would not be approved in time for the renewal period for most firms.

Many commentators questioned whether the SRA actually had the authority to ban unrated insurers from the market. However, it could be argued that all the SRA had to do to achieve its aim was to carry out a thematic review of firms holding unrated insurance and get them to justify how they could meet principle 8 (running the business in accordance with sound risk management principles) by being insured with such an insurer, when they knew such a move was seen as a very high-risk strategy.

However, after a number of announcements by the SRA, there are signs that the PII market may become more stable and predictable from October 2014.

The first SRA announcement was that it would not ban unrated insurers from the market due to concerns over what impact this could have on
the firms covered by this sector; I suspect that many law firm partners got a good night’s sleep that night.

The second SRA announcement was in relation to a consultation that would look into the regulatory requirements for professional indemnity insurance; the proposals put forward include a reduction in the level of mandatory insurance to £500,000, an aggregate limit on claims, compulsory cover for individuals, SMEs, trust and charities, a reduction in the run-off period to three years, and a requirement on firms to assess an appropriate level of cover above
the minimum.

Reasonable demands

On the face of it, the SRA’s proposals, if adopted, should bring the stability and flexibility many firms have been looking for, however, if the changes are to have the impact that is envisaged, insurers and other third parties need to play their part. Insurers need to ensure premiums are offered at reasonable levels and third parties (including lenders) need to ensure they do not place unreasonable demands on firms to obtain insurance from rated insurers where premiums may be substantially higher than those offered by unrated insurers.

It could now be argued that if the SRA is content for firms to be insured by unrated insurers then so should lenders.

Whatever the outcome of the consultation, insurers will still expect firms to be good risks and will only want to cover those that are well managed and run in accordance with good risk management principles so firms cannot relax
their guard.

What has become clear is that the solicitors’ PII market needs fixing and, for many firms and their clients, it needs fixing quickly. Firms cannot effectively plan for their futures and the future provision of legal services with so much uncertainty and therefore it is imperative that all parties take what appears to be the ideal opportunity to establish a solution that works
for everyone. SJ

Brian Rogers is the director of regulation and compliance services at Riliance ?www.riliance.co.uk