The impact of cybercrime and fee growth on PII premiums

Another renewal season for professional indemnity insurance (PII) is over. Despite the removal of the single renewal date, most law firms in the UK have just concluded this exercise. This year has been generally accepted as a relatively benign environment for renewal, although there have been a couple of key underlying currents in underwriters' minds.

First, firms whose growth over the past year or so has been built on residential conveyancing can expect to have seen this reflected in their renewal premiums. If the work represents a higher proportion of the overall fees, then insurers will usually judge the risk to be greater.

Second, cybercrime and social engineering fraud have become much more prevalent over the past year. My contacts in banking tell me that there has been an exponential rise in these cases.

Sometimes this has involved firms allowing malware to infect their computers, allowing hackers to install keystroke tracking programmes. Sometimes scam emails have persuaded firms to disclose their internet banking credentials to criminals. On other occasions, firms have succumbed to highly-skilled fraudsters using sophisticated 'vishing' (voice 'phishing') techniques to extract internet banking credentials.¹

Whatever the technique, the end result has been the theft of client money. We encouraged our members to include with their PII proposal a statement covering their procedures for dealing with these serious threats, which seems to have been well received by underwriters.

Impact on premiums

I've just been through the renewal exercise with the brokers for our group scheme, through which 60 of our member firms benefit from bulk buying. While each firm is assessed separately, they have leverage through the shared benchmark of our mandatory ISO 9001 quality standard.

Our scheme renewal was undertaken against a background of growth in fees; nearly 80 per cent of members reported higher fee levels this time around. The more work you do, the more risk for the insurer.

It was important for our members to see their premiums reflecting their continuing efforts to manage risk in their firms. In this context, I like to compare the rate (i.e. the premium expressed as a percentage of fee turnover) against the previous year. We saw this fall to an average 2.3 per cent of fees across our network - a reduction of more than seven per cent on the past year's equivalent measure. Around 40 per cent of our members paid a rate of less than two per cent, and almost three quarters paid less than three per cent of their fee turnover.

Insurers should recognise law firms' efforts to improve risk management. We look for concrete signs of this at each renewal, and it was pleasing to note that more than half our members saw their own rate against fees fall.

When we look at the absolute premiums paid, around 50 per cent paid the same or less than last year, notwithstanding the backdrop of growth described above. We saw examples of premium falling by as much as 14 per cent where improvements in risk management processes and behaviours leading to reduced claims were being recognised and rewarded.

Relationship management

While PII is undoubtedly a regulatory 'must-have', it is so much more than a commodity purchase. We consider our stable relationship with our scheme broker and our underwriters as fundamental.

Firms should be wary of insurers which offer attractive premiums (to bring in new business) but are highly reactive to claims. Our own insurers take a long term, balanced relationship-based view and work, along with their panel solicitors, in a constructive way with our members when claims arise. To my mind, this is the true test of PII arrangements, and our members comment very positively on the claims handling experience - so much so that our insurers and their panel solicitors are very welcome guests at our annual conference!

At a time when the SRA has been consulting on its proposals to change the extent of PII cover, our members are mindful of the collateral risk of diluting the present minimum levels of cover. They appreciate that larger commercial clients would be less likely to instruct them if they were to cease to benefit from protection. They understand the practical concerns that arise if minimum cover levels were to change. Imagine having to routinely ask other firms what level of cover they have before deciding on whether to accept their undertaking.

Chris Marston is chief executive of LawNet (www.lawnet.co.uk)

References

1. See ‘Five global law firms hit by cybercrime in the UK this quarter’, Manju Manglani, Managing Partner, 24 September 2015 (managingpartner.com/node/8344)