Open market for solicitors’ PII is standing the test of time

“Bring back the mutual” is a call you often hear when solicitors' PII is being discussed within the legal profession.

On the contrary, the open market has offered a strong and lasting solution for the legal profession. And the introduction of Howden’s new exclusive PII facility confirms that we have turned a corner from the hard market you have endured in recent times.

It’s useful to wind the clock back on solicitors’ PII in order to fully appreciate the benefits that have been delivered by the open market. [i]

PII did not become compulsory for solicitors until 1976. A Master Policy scheme was introduced at this time, underwritten by Lloyd’s syndicates and other commercial insurers. It only lasted 10 years. Premium was apportioned by the Law Society between firms. A very blunt model was adopted with the apportionment based on the number of partners, although subsequently other factors were introduced.

In the mid-80s losses spiralled and for the period from 1981-86 the claims paid and reserved two years after the conclusion of each policy year were never less than 150% of the annual premium. In 1986 the Law Society experienced difficulty placing 100% of cover and so in 1987 the Solicitors’ Indemnity Fund (SIF) was born.

While some in the profession still consider SIF to have been the “Holy Grail”, it likewise encountered difficulties and only lasted 13 years.

SIF took out “stop loss” cover which would pay out if the total value of claims exceeded a certain level. In the 1990/1991 indemnity years the stop loss insurers suffered a total loss of £50m. As a result SIF were unable to obtain stop-loss cover between 1990 and 1996. Any shortfall over and above the premium collected required funding from the profession – and by June 1997 the shortfall was estimated at £454.5m. The need for cash calls and concerns about the apportionment of the cost of cover between firms were significant factors in driving a review of the mutual, and in 1999 the profession voted for the current open market arrangements.

In contrast to its forerunners, the open market has been in operation for 23 years. There have been ups and downs along the way and the profession has continued to experience significant claims in terms of both volume and quantum. The open market claims data for the period from 2004 to 2014 published by the SRA in 2016 provides clear evidence of this[ii] - and that data was limited to 75% of the market insurers and only detailed claim payments and not reserves.

It is also worth noting that over the years some insurers have encountered solvency issues as a result of the level of claims activity, prompting their departure from the market. This has focused the profession’s attention on the importance of securing cover with an insurer that has a strong financial rating as this provides a helpful indicator of its ability to stay in business and pay claims.

We do not underestimate the difficulties the legal profession has endured over the last few years with a combination of market correction and the hard market leading to significant increases in premium. The legal profession has not been alone in this and other professions have been similarly affected. The good news is that we now appear to be through this storm and we have been observing a “flattening of the curve” since the October 21 renewal. For the April 2023 renewal a number of firms in fact experienced a rate reduction and although some premiums might have increased, this was mainly due to the reduced rate being applied to an increase in gross fees of the insured practice. You can read more about this in our latest Market Report available here.

PII cover for solicitors also remains broad, ensuring that firms are well protected in the event that a claim arises. The Open Market also covers firms for £2m or £3m minimum whereas SIF only covered £1m each claim during its existence. And once you have paid your annual premium that’s it ……you do not need to be looking over your shoulder to see if an additional cash call is coming your way as in the days of the mutual. The solicitors’ PII market also continues to have a good number of A-rated insurers signed up as “participating insurers” with the SRA and at Howden we enjoy strong relationships and wide access to this group.

[i] All historic information in this article relating to the Master Policy and SIF have been sourced from the report completed by Charles River Associates for the SRA available here: Review of SRA client financial protection arrangements

[ii]Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historic claims data (sra.org.uk)