Solicitors’ PII Renewal 1 April 2020 – An Overview

On the evening of Monday 23 March Boris Johnson announced we should all stay home. The 1 April renewal for solicitors’ Professional Indemnity Insurance (PII) was only days away and 33% of our solicitor clients renew on this date.

Would it work with solicitors, brokers and underwriters all working from home on laptops and phones? The answer is a resounding “yes it did”.

We are pleased to report that Covid-19 was not a barrier to business and we were able to operate on a “business as usual” basis despite the unusual times. Our own IT systems were able to cope with remote working as were those of Participating Insurers. Our strong relationship with the insurers we work with meant that we were able to engage with ease and receive quotes for our clients without difficulty.

We take this opportunity to remind you that we are only a phone call or email away and continue to be available to provide advice and assistance regarding your insurance needs. It is difficult to know how long the current lockdown will continue and we are conscious that this will be having a significant impact on the profession. For those firms that renew on 1 October we again stress that the current working arrangements will not compromise the renewal process, but it will be even more important to start early. 

We are in a hard market

Premiums for solicitors’ PII increased through 2019. For 1 April 2019 our analysis showed an average rate increase of 4.87% and at 1 October 2019 the average was 12.94%. This trend has continued and those firms renewing on 1 April 2020 saw further increases. We consider this to be the hardest market since the profession moved their PII arrangements from the Solicitors’ Indemnity Fund to the open market. This was anticipated even before the Covid-19 crisis. In our Market Report published in January 2020 we advised that we expected to see further rate increases for 1 April renewals and that is exactly what has occurred.

The move towards a hard market began with the Lloyd’s Report in July 2018, when Lloyd’s identified a need for their syndicates to return PII business to profitability. Company insurance markets have also followed this lead. The position is further impacted by the fact that insurers of solicitors’ PII continue to incur significant losses, particularly in relation to property work with claims arising from the failure of buyer-funded developments being an issue alongside other failed investment schemes. Even the Compensation Fund is creating a £30m contingency fund to deal with claims of this nature and it only deals with a fraction of these matters, on the very rare occasions where there is no cover available under the primary £2m or £3m cover that follows the Minimum Terms and Conditions (MTCs).

Fortunately there is still plenty of A-rated capacity for the primary market, however appetite is more restricted than we have seen historically. We also saw this last year. Conveyancing is certainly an area where insurers are looking to control their exposure and when it comes to new business many are requiring that conveyancing work does not exceed a limited threshold. Firms with a significant conveyancing practice were therefore more challenged when it came to sourcing alternative quotes to measure against the renewal terms they received from their current insurer. At Howden we have direct access to a large range of A-rated insurers, including excusive arrangements with some. This proved to be a huge advantage when it came to sourcing alternative quotes.

Premiums for excess layer insurance also increased further for 1 April cases. There are also capacity issues in the excess layer market, with some insurers withdrawing from this sector over the last 18 months. There are now few options available and prior to the 1 April renewal one excess layer insurer even introduced their own questionnaire that firms were required to complete before a quote was forthcoming. Once again this is a response to the fact that in recent years excess layer insurers have been faced with a number of high value claims. Notwithstanding the increased premiums, excess layer cover still represents good value for money.

Eighteen month policy periods continue to be rare in the current market. Of the firms we renewed on 1 April we had 69% that had just come to the end of an 18-month deal. In contrast, only 12% of the book renewed on an 18-month deal. Where the extended policy period was available, insurers did not use a straight pro-rata premium calculation, but offered with a rate uplift being applied to the additional six month period.

Looking ahead

We are now turning our attention to 1 October, which still remains the most significant renewal date for solicitors’ PII. Prior to Covid-19 we anticipated that there would be some additional rate increase in October, and firms are now asking whether Covid-19 is going to harden the market even further. It is still early days and the answer will depend upon the view that insurers take regarding an increased level of risk. Remote working does bring challenges with regard to issues such as supervision and confidentiality and as deals fall apart clients who have suffered loss will look for someone to blame. We know that solicitors are always a target and to the extent that there is any increase in claims activity as a consequence of Covid-19, then that will inevitably filter through insurers’ rating models and impact premiums.

Insurers are also likely to be concerned about a potential increase in unpaid run-off premium if solvency issues lead to the closure of firms in the wake of the crisis. It is therefore critical that firms focus on both financial and risk management over the coming weeks. At renewal we would also recommend a short section in your covering letter noting the new initiatives you have put in place to deal with the unprecedented change to the way we are now working.

It is inevitable that, for most firms, the current crisis is going to lead to a drop in gross fees, at least for a period. We have been asked whether this will translate into a corresponding reduction in premium. Given insurers apply their rating to the last complete financial year, firms should not plan for any premium relief in the short term and while the hard market continues premiums are unlikely to decrease in any significant way, even if there is a projected decline in fees. 

At this point there is also a question as to whether there will be a reduction in traditional financing arrangements that are available for both PII premiums and practising certificate renewal fees and it is possible firms will see a greater demand for guarantees or security over personal assets. We therefore recommend that firms start to consider financing options as soon as possible.

5-Point Action Plan for 1 October 2020 Renewals

If your firm renews their PII on (or before) 1 October, then we urge you to start working on this now. This is not the year to leave it until the last minute. Howden offers the following advice:

• Talk to your broker early to understand what you can expect from your insurer with reference to the profile of your particular firm.

• Agree a timeline with your broker for submission of your proposal form and ensure that you then provide appropriate deadlines to those in the firm who need to provide you with the information that is needed.

• Take time and care with your proposal form and accompanying documentation to ensure it provides the best possible presentation of your firm. Your PII premium represents a significant spend in your budget and justifies the investment of time to complete your submission.

• Review your budget for PII and make adjustments based on advice from your broker.

• Consider all available finance options. Given the financial pressure created by Covid-19, we expect that more firms will need to look to finance their premiums for the 1 October renewal. If your firm is under financial pressure this might not be as straight forward as it has been historically. Allow yourself plenty of time to source available options and find the best deal.
   

Stay tuned for more information, analysis and advice in our full Market Report to be published in June 2020.