Law Society annual PII survey quantifies impact of market instability
The Law Society's annual survey of solicitors' experiences of professional indemnity insurance (PII) renewal reveals that despite a difficult renewal experience for firms of all sizes, the vast majority of firms were able to renew their insurance last October.
The findings show that the renewal experience was particularly difficult for smaller firms. XL, previously the largest PII insurer, had all but withdrawn from the PII market. Meanwhile, firms which had policies with the beleaguered unrated Latvian insurer Balva were also particularly affected.
- The number of law firms renewing their PII with their previous insurer fell by 11 per cent from 94 per cent last year to 83 per cent this year.
- Of firms finding the renewal process difficult, 14 per cent linked this to insurers withdrawing from the market or 'going bust'.
- 68 per cent of firms which had had policies with Balva found renewal particularly difficult.
Despite an increase of awareness of the Law Society's campaign on the importance of considering an insurer's solvency, the survey found that unrated insurers increased their share of the market, yet again, to 22 per cent of all firms.
- Cost remains by far the most important factor in decisions about which insurer to use.
Smaller firms still spend a greater proportion of their gross fee income on PII than larger firms, though the amount had fallen slightly.
- 11 per cent of firms postponed their decision to retire because the process was too expensive. The cost of run-off cover varied typically between 200 per cent of annual premium to 300 per cent, though instances of 600 per cent were also reported.
Almost one in twenty firms - most of which were small firms - reported entering the extended indemnity period (EIP), the transitional arrangement that the Law Society had successfully lobbied the SRA for in order to help firms struggling to find insurance.
One per cent went on to enter the cessation period during which they had 60 days in which to close their firms in an orderly fashion - unless they managed to secure insurance by 29 December 2013.
Law Society president Nicholas Fluck said:
'We will continue with our campaign of education and support for firms. By purchasing PII you are buying a claims service, so you need to ask yourself whether this will be available to you in the event of a claim made against your firm. As many former Balva firms are now acutely aware, the consequences of not checking the financial strength of an insurer before purchasing their PII policy can be significant.'
Alan Radford, chair of the Law Society PII committee, said:
'While it is encouraging to learn that, in the face of the market upheaval last year, many firms were able to use the market to their advantage, the survey findings reveal some worrying experiences. These include high levels of dissatisfaction with brokers, the large proportion of firms which entered the EIP and the high costs of purchasing run-off cover for those solicitors looking to retire. We will examine how the Law Society's online guidance might be improved to help firms avoid difficulties in the next renewal round. We will also explore with the SRA how the costs and burdens of retirement and closure might be reduced.
'The biggest uncertainty concerns the outcome of the SRA's proposal to introduce mandatory ratings for participating insurers, which threatens to exacerbate instability in the solicitors PII market. Delays in announcing the outcome will make it difficult for insurers and firms to plan carefully for the next renewal and for the Law Society to advise firms how to use the market effectively.'
View the Law Society survey findings
Notes:
The PII study was conducted at the request of the Law Society by an external provider, IFF Research. The study surveyed 595 law firms ranging in size from sole practitioners to firms with 25 partners about their experiences and perceptions of the 2013-14 professional indemnity insurance (PII) renewal process. The analysis is representative of the Law Society's member population by size (number of partners) and region. An equivalent survey has been conducted annually since 2008.
The assigned risk pool (ARP), the historic safety net for firms unable to find cover in the open market, was closed by the SRA on 1 October 2013.
To help firms try to remain in business while they sought to secure PII in the run-up to renewal of policies by 1 October 2013, the Law Society successfully lobbied the SRA for transitional arrangements. Firms that ran into problems in securing insurance by this date and who would otherwise have been forced to close, were able to benefit from the introduction of the extended indemnity period (EIP), which provided for up to 90 extra days to find cover before the SRA closed a practice.
If firms were unable to obtain alternative cover during the 30-day EIP, they had a further 60 days cessation period (CP) to plan to close in an orderly fashion before the end of the year, during which time they were not permitted to take on new work but could continue to work for existing clients and to seek insurance cover. The process was similar to previous years when firms entered ARP and exited by obtaining cover within 30 days.
The Solicitors Regulation Authority (SRA) does not undertake any solvency checks on insurers. It has however introduced a transparency requirement for all participating insurers. which must disclose whether or not they have a financial security rating and the provider of this rating. The SRA consulted at the beginning of this year on a proposal to require a minimum level of financial security for participation in the solicitors' PII market. The Law Society's response to the SRA consultation was that it did not support this requirement as it would not resolve the concern about the risk of insurer insolvency and risked premium rises for smaller firms and further closure in this sector. Particularly affected would be BME firms, female-led firms and sole partners considering retirement.
The SRA and the Law Society do not vet, approve or regulate insurers. The SRA enters into the PIA with insurers each year where they agree to provide solicitors with policies in accordance with the minimum terms and conditions in the SRA Indemnity Insurance Rules.
Regulation of insurers is undertaken by the Financial Conduct Authority, or, where an insurer from another jurisdiction is passported into the UK system, the financial regulator of that jurisdiction.
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