The annual merry-go-round

The professional indemnity insurance season is upon us once again, and even though the renewal dates rules have changed, most firms will still renew on 1 October.

The end of the assigned risks pool was supposed to increase the attraction of this market for insurers as the levy to pay for claims of insolvent firms disappeared; lower charges were forecast for law firms as a quick consequence of this change. In reality, this new dawn has yet
to appear.

After salaries and property costs, indemnity insurance is one of the biggest cheques we all write each year. A well-managed firm with a spotless claims history could pay under two per cent of fee income. The average premium for most firms falls between two per cent and four per cent. Therefore, if a law firm succeeds in renewing on the best terms, it might save the equivalent of one per cent of fee income, perhaps four per cent
of profit.

The market cost of indemnity insurance tends to fall for one of two reasons: either the number of claims falls, giving both existing and new insurers more confidence about future claim levels, or new players with deep pockets enter the market seeking a significant share. New players cut prices in year one, expecting to raise them again gradually over a period of
time as they gain maturity in
the market.

There are a handful of insurers who have stayed long term in the market. They understand the risks and can afford to be choosy about who they insure, which is good news for them but not for owners of firms. New entrants tend to arrive with a bang and big promises, only to sneak away after two or three years without delivering.

Risk management

How do we succeed in getting decent cover? The first way to reduce the premium is to improve risk management. I have yet to meet a lawyer who joined the profession for the joy of risk management, but it preserves reputations and can enhance client service.

Second, know your broker. Check their reputation among other law firms of a similar size. Ask how well the broker knows the underwriters of the insurers you intend to approach; can they demonstrate a good knowledge of which insurers are most likely to be interested in your firm? I have found that a carefully targeted campaign to a small number of insurers is more likely to succeed than a speculative approach to a large number of insurers.

Third, benchmark your broker against others, but not every year. Ensure you manage the process so that different brokers do not approach the same insurer.

Fourth, ensure your proposal form is attractive to underwriters. There are surprisingly few underwriters among indemnity insurers who love the renewal process even less than lawyers. They want to keep their best customers while adding the best new business they can. To stand out, your proposal needs to be sponsored by a reputable broker, contain enough information to allow the underwriter to understand your business fully, demonstrate good risk management and a willingness to learn from mistakes if and when they do happen.

Fifth, understand that underwriters will reject most proposals put to them. They will reject proposals that arrive from more than one broker – a sign that the firm has a scattergun approach to renewal and is not serious about them. Proposals which are incomplete – insurers assume you have something to hide if you do not answer a question. Late applications, they want to tie up their business in good time. Last, those firms who change insurers too often. They assume you will not stick with them for long either.

To conclude, ask about the claims management process for each insurer. If you are unfortunate enough to have a claim, the way in which claims are handled can differ materially between insurers.

Good luck with your renewal in 2014. SJ

Stephen Chalmers-Morris is practice manager and partner at Gorvins Solicitors