PII renewal season: Get into shape this summer

The nights are getting shorter and spring is in the air. That can only mean one thing: six months to go before firms renew their professional indemnity insurance (PII).

Last year saw delays and disagreement from
the Legal Services Board (LSB) over the Solicitors Regulation Authority’s (SRA) proposed changes
to PII, notably the level of minimum cover.

When the SRA published its consultation paper in May 2014 covering the scope and depth of PII, most of us were surprised. It seemed to come out of the blue, and one wondered what had driven it and what the rush was all about.

The outcomes of that consultation were much less of a surprise, with the SRA deferring a number of the ideas, but proposing a new minimum level of cover at £500,000. The LSB did not respond in time for any change to the October 2014 renewal round and, when they did respond, it was to
firmly bounce back the proposal for a reduction,
saying that the current £2m level – or £3m for incorporated firms and LLPs – should remain
in place for now.

This was a decision welcomed by the Association of British Insurers (ABI), who had argued that reducing the minimum level of PII cover for solicitors would not change the risk profile of the firm or have an effect on premiums, and would only increase the risks to consumers
if things go wrong. James Dalton, the ABI’s
head of liability insurance, said: ‘Consumers will
end up paying the price because the SRA thinks
solicitors should save money rather than protect consumers. The SRA is misguided in thinking that lowering the limit will lead to a meaningful reduction in premiums for small firms.’

The other proposals arising from the SRA’s consultation – the introduction of an aggregate claims cap, a limit to the scope of cover for some client types, and a reduction in run-off cover to three years – are also in the long grass for now, but are likely to come back onto the agenda.

We also have to contend with continuing uncertainty in the PII markets and the fact that premiums are usually the biggest cost for any firm, apart from staff. Despite that, many firms simply don’t know whether they are getting
the best deal they can or what they could do to reduce the premium. Some managing partners, despite the cost, would not be able to tell me how much they paid – not even to the nearest £10,000.

For most firms, PII renewal comes into view
just once a year, usually in September, when they
rush to get proposal forms into their brokers, despite the demise of the single annual
renewal date. By then, it is too late to work on reducing the premium.

Insurer confidence

Claims levels are still running too high in the sector and that simply does not give insurers confidence. Research undertaken last year by insurance brokers Marsh shows that the top trio for claims are residential and commercial conveyancing, followed by trusts and probate. That is not surprising in itself, but what was interesting was that when digging deeper,
Marsh found that the bulk of the claims were centred on the final stages of conveyancing transactions. The charts above show the position starkly in terms of frequency and severity.

Insurers use this data in assessing the risk a firm presents to them, and although the frequency of conveyancing claims is relatively low in the context of the vast numbers of transactions undertaken, the severity tends to be high in line with property values. There is much that can be done to avoid such claims, and both brokers and primary insurers can offer practical advice and tools to help with this. The answer could be as simple as random sampling and independent checking of the completion statement.

Robust customer care and risk management processes are vital throughout the firm to control premiums and avoid costly claims. Firms can start by getting the right quality marks, but then they must make sure they adhere to the procedures rigorously. They also need to assess risk continually throughout their practice and embed a culture of risk management. It is a virtuous circle, where if you manage risk and get claims down, you will see insurance costs reduce.

Stamp of approval

The SRA is driving better management of risk in firms. Consequently, compliance has become a significant challenge, especially in smaller firms which may not have the resources for effective implementation. Introducing Lexcel or ISO 9001,
or both, would be a good starter, but few firms are committed to either, with only around 12 per cent currently having Lexcel, for example. LawNet members are signed up to a quality mark, underpinned by quality management system ISO 9001, and insurers recognise this by offering better PII terms. Last year’s renewal exercise saw our firms’ premiums averaging just over 2 per cent of fee income, whereas anecdotally the average across all firms in England and Wales is closer to 4 per cent. We know that is because underwriters like the attractive risk profile of ISO quality-accredited membership.

I expect the PII market to remain competitive
for those with a healthy risk profile, but with little prospect of any change in fraud levels in everyday legal work areas, such as property, premium levels are not expected to drop significantly. Indeed, many firms have been busier in the conveyancing arena and this could lead to higher premiums as a result.

This is where risk management shows its value
in running a law firm today – getting it wrong and ending up with a claim can have far-reaching and long-term impacts on premium. If you have had
a bad claim, it is vital to show that you have taken steps to rectify the issue that caused the claim in
the first place. Unfortunately you are unlikely to
see an instant improvement on your premium, as
the outstanding risk to insurers from the original breakdown will remain for some time. It needs
to ‘wash through’, and that can take several years.

Avoiding temptation

The type of work firms undertake can also affect premium levels as insurers’ appetites vary greatly. Some have a penchant for niche work, others for work considered high risk for fraud and claims. Firms should also avoid the temptation to take
on work outside their core areas of expertise, even
if the availability of other work is declining, as this immediately exposes them to unnecessary risk
and a greater likelihood of claims arising.

This is all part of the balancing act for smaller firms. How can you keep costs down and run a lean business while also dealing with the ever-increasing burden of compliance?

One option is to seek outside help with compliance and risk management. This is increasingly becoming accessible for firms of all sizes. Another is to explore how membership of
a group might secure better terms.

When firms combine together to purchase
their PII cover, they receive the benefits of bulk purchasing, but nonetheless pay a premium which reflects their own work types, risk management, and claims record. That is how LawNet operates; however, no member firm will ever subsidise another.

It remains to be seen how the insurers will
view some of the recent developments at
the next renewal. Will they, for example, seek confirmation from you that you are putting in place a learning programme in your firm that meets the requirements of the work you do and the clients you serve and which fits the SRA’s new approach
to continuing competence?

Could insurers decide that they will consider
the risk lower for conveyancing firms if they are engaged with Veyo? And will the hot topic of cybercrime lead your insurer to ask about your anti-virus protection and internal policies to protect client data and client money against cyber-attacks? These are all questions you should be asking your broker ahead of your renewal.

Last year’s renewal saw a very small rise in premiums across our membership, but that is hardly surprising when fee income grew strongly across the board, with much of that growth driven by residential conveyancing. On a more granular level, firms had different outcomes depending
on their individual circumstances.

Despite the (so far abortive) debate about the minimum level of cover, we believe the real issue
is for firms to assess the right level of cover for the work they do and aspire to do – bear in mind that most of the cost is in the primary layer of cover, and any top-up is comparatively cheaper. It is also just as important to set your excess at a level you are comfortable with. This can reduce your premium, but essentially it is a judgement call based on
your cash position and your claims record.

Your PII renewal may seem some distance
away, but making the right decisions now could save you money when the starting whistle blows
in September. Be proactive and drive the outcomes, rather than letting them happen to you. SJ

 

Get PII-fit Review your risk management processes and prepare and update recent and current activity ready for insurance submission. Make sure you know everything you should about your PII profile, claims history, and how much it costs. Check with your insurer and challenge if appropriate. Engage with the risk management processes your insurer provides. Understand the causes of past claims and be satisfied that you can articulate the steps you have taken to prevent recurrence. Your brokers and their expertise and market leverage are important, and can help you to build a relationship with a reputable, rated insurer. Using unrated insurers can be an expensive choice in the long term. Provide as much information as possible. Insurers are selective with so many  firms renewing their PII at one time; it is like a CV, what makes yours stand out? Do you provide the bare minimum, or does an accompanying risk policy statement tell a compelling story? What does your submission tell the insurer about your culture, management structure, and strategy, and your approach to recruitment, training, and quality? Submit your proposal form as early as possible as this will give you and your broker more time to negotiate terms and answer any additional questions insurers may have. Demonstrate excellent quality and risk management procedures in your firm. Show good discipline in closing off old claims, making sure you update your records and are proactive in dealing with them – this is essential in managing your premium downwards.

 

Deciding the right level of cover Look at values for each type of work your firm undertakes. It makes sense to consider the highest values you are likely to encounter, bearing in mind the ‘claims made’ policy and limitation period. Take into account the definition of ‘one claim’ in the policy, i.e. if the policy aggregates all claims arising from the same or related acts/transactions as defined. Is the limit adequate to deal with this? Consider past work values (within the limitation period, which can be more than six years depending on the type of transaction), including that of any practice to which you are a successor practice. Bear in mind future work values anticipated or aspired to, including work that acquired firms or lateral hires may bring with them. Be mindful of your clients’ expectations of you and your wish to have competitive advantage. Allow for mitigation measures – e.g. any limitation of liability you are able to obtain in general terms of engagement or per transaction; specialist or counsel’s advice on high risk/value transactions. Remember that most of the cost is in the primary layer of cover, and any top-up is comparatively cheaper. Building in some headroom can buy you peace of mind.

 

Chris Marston is the CEO of LawNet