Where next with PII?

By Giles Insurance Brokers

Changes are afoot in the UK professional indemnity insurance (PII) market and, thankfully, many firms can expect to see the pressure easing in the 2012-13 season and beyond.

As with most markets, the gloomy economy has had a big impact on insurance, including PII insurers. Some of the larger and more established brands are keen to push the idea that, in these uncertain times, longstanding insurers with a far stronger balance sheet are a better option than new, untested and niche insurers – but then they would say that.

In fact, the entry of some newer PII insurers last year, including First Title, APRO and Enterprise, helped to invigorate the market and enhance competition. This offered many firms a PII lifeline, especially smaller practices.

In some instances, these new entrants have been introduced by specialist brokers, which are increasingly being seen as a route to more flexible PII solutions. In fact, as Managing Partner previously reported, nine per cent of the top 100 firms changed broker in 2009, up from a low of five per cent in 2008.

Here, we take a look at insurer reactions to changes to the assigned risks pool (ARP), outcomes-focused regulation (OFR) and alternative business structures (ABSs), and how brokers can add value to your PII solution.

The draining ARP

It’s important to consider how the ARP has been changing, since it’s the most significant influence on the PII market and, in turn, on the appetite of insurers both within the market and those considering entry to it.

Many firms will be relieved by the forthcoming structured abolition of the ARP which, while designed to be a safety net for those that can’t secure cover, has all too often proven to be a double-edged sword.

Not only must those in the pool be inspected at their own expense, attend training and implement special measures, but they can only stay in the pool for a maximum of six months. And, a firm’s presence within the ARP can be seen – however unjustifiably – as a warning sign that not all is well with the firm, with many insurers not even willing to look at firms with an ARP history.

Thankfully, the number of firms falling into the ARP dropped significantly in 2011-12. According to the Solicitors’ Regulation Authority (SRA), the number rose steadily but significantly from 28 in 2007 to a peak of 302 in 2010, but the rate of entry is slowing dramatically: just 32 firms were unable to find cover on the open market in 2011. This can be ascribed to a combination of the SRA’s own reforms, insurers entering the PII market for the first time and law firms becoming more savvy about turning to brokers for help.

According to Martin Hall, senior account executive at Giles Insurance Brokers (professional risks team), which specialises in arranging PII for legal firms, a broker can do far more than simply shop around for a deal. “Finding the right broker can be critical,” he says. “It’s important to choose one that isn’t tied to a single insurer and that will advise on improving your firm’s risk profile, such as the way you assess your clients’ risks.”

“A good broker will help you to complete your proposal form and advise you on what to include, because it will be skilled in accurately representing your firm and how to show it in the best possible light – including the best way to describe large claims the firm may have had to make in the past.”

Hall agrees that the ARP is no longer the ‘ogre’ it once was, either for insurers (which fund it) or law firms. However, he adds, “if the new rules had been adhered to fully, there probably wouldn’t have been any firms in there at all last year.”

“Unfortunately, those who found themselves in the pool continue to find it extremely difficult to climb out by securing approved cover on the open market. Again, a good broker can help to plot a course for the future by preparing a good profile featuring lessons learned, organisational changes made and enhanced risk-management procedures such as Lexcel accreditation, the Conveyancing Quality Scheme and consultations from external compliance and risk management specialists.”

Funding of the ARP will be shared between the insurers and law firms for the first time from 2012, and the pool will be abolished altogether from 2013, along with the single renewal date.

But the legacy of the ARP’s past years’ performance remains; the claims-to-premiums ratios for the 2007 and 2008 seasons were among the highest over the past nine years, with losses of 1,211 per cent and 800 per cent, respectively, according to 2009 data from the SRA.

The impact of OFR

In October 2011 the SRA introduced outcome-focused regulation, another significant factor in law firms’ exposures '¨to risk.

It is expected that OFR will continue to have a positive effect on the PII market by raising the bar for risk management. Firms that can demonstrate a more informed and enhanced approach to risk could well find it easier to access PII and, although they are unlikely to see a drop in premiums initially, this should change as the post-ARP market matures.

Adjusting to outcomes-based, rather than rules-based, regulation will take some getting used to, and it is anticipated that the SRA will be relatively gentle at first when auditing practices.

Firms must appoint a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA) by October 2012. However, it appears that the deadline for formal authorisation and adoption of their roles will be delayed to December 2012.

These COLPs and COFAs will face the SRA’s new enforcement powers, including personal fines and other sanctions in the event of a compliance failure. Unsurprisingly, these compliance officers are starting to realise just how exposed they are, both as individuals and on behalf of their fellow partners. Insurers and brokers have been developing insurance protection for this management liability, so once again you should consult your specialist PII broker.

The impact of ABSs

Despite concerns that alternative business structures would result in a plethora of large name, retail-backed law firms, relatively few have actually been licensed by the SRA, with the first three announced in April. Furthermore, the ABS concept doesn’t particularly concern insurers, since each business will still need to be risk-assessed and be able to demonstrate that it is fit and proper.

The real challenge will come where two or more professional services providers come together under one business model; for example, solicitors plus accountants, surveyors or independent financial advisors.

Insurers currently have no real strategy on ABSs; those with experience in the disciplines involved may react favourably, but others (which either have no experience with them or no appetite for them) are likely to cool.

The insurance of ABSs is still very much up for discussion, with insurers concerned about mid-term changes that they didn’t have the opportunity to underwrite at renewal. Engaging with your specialist PII broker is therefore essential; together, you will be able to formulate a strategy/discussion document for both your current and potential new insurers.

Next steps

Insurers appear to be gearing up early for the 2012 renewal season, possibly seeing the PII market as invigorated and full of possibilities. And, if they’re ready ahead of time, then it makes sense for law firms to take advantage of the timing and secure cover as soon as possible.

Some insurers are mooting the idea of long-terms deals, but care should be taken; these may only benefit a firm when rates are hardening (going up), rather than when there is an expectation of a falling market. Again, it’s best to discuss your options with a specialist PII broker, particularly so that you fully understand the changing market conditions before committing to arrangements for 2012/13 or beyond.

The good news is that the broker market remains very competitive; some have mutually exclusive arrangements, others have an-open market approach. Your best bet is to ask your current broker some of the questions raised here and to look at other brokers to see if they have the right fit with your firm and can approach the market in a way that works for you, rather than against you. In particular, look for brokers that are happy to meet face to face and to invest the time in getting to know you and your business.

 

To discuss anything in this article please contact Martin on Martin.Hall@Gilesinsurance.co.uk