Solicitors' Renewal 1 October 2020 - The Forecast

The forecast set out below is what we anticipate for 1st October 2020 at the date of publishing. However, we are in an uncertain and challenging world, which is changing quickly. We encourage firms to stay in contact with us, so that you know what you should expect and plan for.

We also recommend that those readers interested in additional detail refer to our full Market Report published in June 2020.

Premiums and Rating

Prior to Covid-19 we were already anticipating additional rate increases for October 2020. 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 a potentially increased level of risk.

There is currently a lot of commentary from solicitors’ Professional Indemnity Insurance (PII) defence lawyers highlighting the risk of increased claims activity. Remote working does bring challenges with regard to issues such as supervision, confidentiality and execution of documents, and as deals fall apart clients who have suffered loss will look for someone to blame. We know that solicitors are always a target. 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.

For most firms, the current crisis is also 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 mainly apply their rating to your last complete financial year whilst giving some consideration to your average gross fee income for the last three to five years, firms should not plan for any premium relief in the short term. While the hard market continues premiums are unlikely to decrease in any significant way, even if there is a projected decline in fees.

Insurer capacity and appetite

We are not on notice of any pending insurer departures from the solicitors’ PII market, but again we are watching this closely. Insurers are concerned about the potential for significant unpaid run-off premiums if firms are forced to close due to solvency issues in the wake of the current crisis. At the time of publishing we are aware that a number of insurers have approached the SRA about possible changes to the rules so that they are only required to provide cover if the run-off premium is paid. There may not be enough time to make the required changes in advance of 1st October and if any significant players do withdraw as a result of their concerns, then this could drive rates even higher.

Likewise we are not aware of any new insurance capacity coming into the market. While some insurers might have considered entering the market with higher premiums making the business more viable, the uncertainties created by Covid-19 are likely to cause them to delay until the situation becomes clearer.

In terms of appetite, we expect that insurers will continue to have concerns about conveyancing. Both residential and commercial conveyancing continue to attract a high incidence of claims and insurers are suffering significant losses following the failure of buyer-funded developments and other property investment schemes. Failure to apply for Multiple Dwelling Relief from Stamp Duty is another issue that is generating claims activity and while claims arising from onerous ground rent clauses have been slow, their potential still remains a concern.

Insurers will also be nervous about the impact of Covid-19 on the property market and the potential claims fall-out that will follow. A spike in claims against solicitors generally follows any significant fall in property values. If repossessions rise then lenders will once again pick over the work undertaken by solicitors in the hope of finding shortcomings that will justify a claim. Where a party has walked away from a transaction, the disappointed party will likewise be focused on whether this could have been prevented.

Wills, probate and estate administration are other areas where insurers have been reporting an increase in claims in recent years. There has been a great deal of commentary regarding difficulties with both the taking of instructions for wills and their execution in circumstances where the testator has the Covid-19 virus or is shielding or self-isolating. Regrettably this could lead to later claims by disappointed beneficiaries and it will be an issue that could impact insurers’ appetite for any new business that undertakes a significant amount of private client work.

What insurers will want to know at renewal in terms of Covid-19

As we approach the October renewal, PII insurers are focusing on risks associated with the response to Covid-19 and most are revising proposal forms to include specific questions, or requiring the completion of an additional questionnaire. A number of insurers want to see Business Continuity Plans and the issues covered in the various question sets we have seen to date include the following:

• The firm’s cash position, borrowing capabilities and confirmation that they will be able to meet their liabilities in the coming months
• Expectations regarding future gross fees and profitability
• Details regarding furloughing of staff, reduced hours, redundancies and reduced salaries and drawings
• Arrangements for the supervision and support of staff while working remotely
• Compliance with Client Due Diligence requirements
• Any changes to standard contract terms and conditions with clients
• Ongoing maintenance of electronic diary and document management systems while remote working
• Risk management initiatives that were deployed to respond to the challenges of lockdown and remote working
• Arrangements for taking will instructions and the signing and witnessing of wills and other original documents during lockdown
• Whether file audits have been maintained
• Confirmation that adequate cyber security software has been in place to support remote working and that this has been monitored, maintained and kept updated

Finance arrangements

Finally, we recommend that firms start to consider financing arrangements as soon as possible. There is a serious 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.

Keep in touch with your banking contact and look widely at what options might be available to you as a business – and do it soon.

We invite you to contact us if you have any queries in relation to this bulletin or would like to discuss PII and related insurance products for your firm.