Solicitors’ PII Q&A: 1 October 2021 renewal result

The legal profession is undoubtedly growing tired of hearing about the “hard market” for solicitors’ professional indemnity insurance (PII).

We have been reporting on this for more than two years now. Isn’t the insurance market supposed to be cyclical? There were varying further increases in premium for most firms renewing on 1 October and we continue to wait for the cycle to move on to a “softer” phase.

We will provide an in-depth analysis of the 1 October PII renewal result in our bi-annual Solicitors’ Market Report to be published in January 2022, but in this Q&A we provide an overview and highlight some of the current issues. We hope this will be of interest to firms reflecting on their recent renewal and those looking to renew in the coming months.

Did premiums increase?

At Howden we are still analysing the numbers, but it is clear that premiums have increased across both primary (compulsory £2m or £3m cover under the Minimum Terms and Conditions) and excess layers. The reason for the increase is two-fold:

As far as primary cover is concerned, the level of rate increase varied depending on the insurer and the unique characteristics of each firm. Insurers have differed in the amount of rate increase they have been seeking at various renewals over the last two years and some were seeking more rate than others on 1 October. The work split and claims experience of each firm are other factors that significantly influence the increase in rate. It is important that firms consider these issues when comparing rate increases with their peers.

In the excess layer market we saw more significant premium increases than in the primary market. We are continuing to see more claims against solicitors that exceed the primary limits. Excess layers up to £10m are now readily acknowledged to be “working layers”, which is the range within which insurers expect to see a frequent incidence of claims. As a result, insurers have either left this part of the market or continued to increase their rates in an effort to ensure the business can be written profitably.

Were insurers also asking for higher self-insured excess?

While we saw some instances where insurers were seeking a higher self-insured excess, either generally or with regard to certain work areas, it was not a significant issue for most firms. There is always a balance for underwriters between ensuring that the self-insured excess is high enough to encourage firms to be diligent about managing risk, but still at a level that does not impact the solvency of a firm. If a self-insured excess is too onerous, there is always the potential risk that it could force the closure of a firm, leaving the insurer to pay the excess and provide 6 years of run-off cover without receipt of the run-off premium. Firms also need to be mindful of the risk. While a higher self-insured excess might reduce the premium, the discount achieved is often not as significant as expected, and it is important that firms ensure they will be able to pay the self-insured excess if a claim is made.

Did insurers have an appetite for new business?

Lack of appetite for new business amongst Participating Insurers who provide the compulsory £2m or £3m cover remains an issue. While insurers continued to offer terms to existing clients (absent any issues of concern), they had limited appetite for taking on new cases and only did so after careful scrutiny and satisfying themselves that the firm was a suitable risk. Conveyancing remained a particular area of concern for underwriters and most continued to adopt a relatively low threshold for the amount of conveyancing work undertaken as percentage of overall gross fees.

The lack of appetite for new business amongst Participating Insurers meant that many firms were left with limited choice if they were not satisfied with the renewal premium quoted by their existing insurer, or were keen to change insurers for other reasons. Fortunately Howden has access to a number of A-rated markets that can be approached to mitigate this scenario.

As far as the excess layer cover is concerned there was again limited appetite for new business and excess layer markets continued to want a great deal more information than they have historically.

Some firms reported that they were being contacted by other brokers with promises of alternative quotes for their compulsory cover. Firms do need to take care on this issue as there can be a significant gap between what is promised and what is ultimately delivered. Choosing the right broker to represent you in the market is even more important in the difficult market we are experiencing. You could spend significant amounts of time completing additional proposal forms for no gain, and it is always important to ensure that your proposal form is not being submitted to the same insurers from multiple sources. The Law Society provides guidance on this issue (available here) and we also recommend our own article discussing this issue (available here).

Were there any capacity issues?

Capacity is the maximum amount of liability that an insurer is prepared to assume. When that maximum level is reached the door is closed to further business. This is one of the reasons why we have been encouraging firms not to leave their renewal to the last minute.

Fortunately, due to Howden’s strong relationship with the insurers we work with, we did not experience capacity issues that became a barrier to renewing business. But we continue to monitor this as it is becoming more of an issue generally across the PII market and particularly in the excess layer market.

Did any new Participating Insurers join the market to take advantage of the high premiums?

Despite the sustained increase in premiums, there were no new players signing up to the SRA’s Participating Insurers Agreement to write to primary cover. We believe insurers remain concerned about the high incidence of PII claims activity that is generated by the solicitors’ profession generally and the potential for this to increase even further.

Howden remains of the view that the introduction of new insurers to the solicitors’ PII market will assist to stabilise the ongoing increases in rate. As a broker we are therefore committed to pressing forward with our efforts to secure potential markets.

Why were PII underwriters so focused on cyber issues?

Firms renewing on 1 October will have noticed that there were more questions and focus on cyber security issues, including enquiry as to the cyber security insurance cover firms have in place. There are various reasons for this.

Firstly, cyber security is a real issue of concern given the amount of sensitive and confidential information that solicitors deal with. A thematic review by the SRA reported in 2020[2] highlighted that this was an area where many firms have more work to do and we have written about this issue on various occasions.

The fact that many fee earners are now working remotely as a result of the pandemic has increased the risk level even further. Many firms were not as ready as they would have liked for the sudden change in working arrangements, which involved a significantly greater reliance on technology. The SRA have also documented their concerns on this issue.[3]

Where there is a breach of cyber security, there is a significant risk that PII claims will follow. At Howden we have also reported on the increase in notifications to PII policies that are related to cyber issues. Insurers have likewise become increasingly aware of the potential for poor cyber security to lead to clients suffering a loss that then becomes a claim under the PII policy. They are therefore very keen to understand what measures firms have put in place to address the risk.

The extent to which PII policies will respond to losses arising from cyber related incidents has also come under the spotlight following a decision by the Prudential Regulation Authority and Lloyd’s requiring all insurers to address the issue of “silent cyber”. This means that insurance policies need to be specific as to whether losses arising out of cyber-related incidents are covered or excluded. The SRA consulted on the issue earlier this year and intends to amend the Minimum Terms and Conditions to ensure that there is no change to the existing scope of cover for third party claims. The wording they intend to introduce was not finalised in time for the 1 October renewal and some insurers were concerned about what the scope of the changes will in fact be.

What are the other issues currently troubling underwriters of solicitors’ PII?

The high incidence of claims activity in relation to the solicitors’ profession generally is well-documented. From time to time specific types of claim emerge and increase losses even further. More recently, claims in relation to failed buyer-funded developments and other investment schemes have aggravated the position with insurers making significant payments to settle claims and holding large additional reserves for matters that are ongoing.

Insurers are also concerned about what is on the horizon and the following issues are of particular note:

Were insurers requiring personal guarantees from principals in LLPs or other incorporated practices?

As a broker this is a development we have pushed back on wherever possible. The imposition of personal guarantees is a response by some insurers to the SRA’s refusal to amend the Minimum Terms and Conditions to remove the requirement for insurers to pay the self-insured excess and shoulder the burden of 6 years run-off cover without payment of premium in the event that a firm fails during the policy period.

Understandably, a request to provide a personal guarantee was not welcomed by the principals concerned and some of those who found themselves in this situation chose to accept a higher premium from an alternative insurer. If this was not available, then the stark choice was to either accept the personal guarantee or close the firm.