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Professional Indemnity Insurance - your views

Professional Indemnity Insurance - your views

To improve the relevance and quality of our Professional Indemnity broking services, we invited law firms to complete a questionnaire about their experiences when arranging cover for the October 2012 renewal.

Between January and April 2013, over 120 4+ partner firms gave us their views. Aggregate results reveal interesting perspectives about the operation of the indemnity insurance market, attitudes to change - and how well broker service matched up to expectations.

Here we provide a synopsis of the results, coupled with comments from Ged Wood, Professional Indemnity Manager, on the implications for our broking service as the 2013 renewal season “kicks off” in earnest.

Getting quotes - whose going to market?

 

Our survey results showed that 70% of respondents secured alternatives to their current insurers’ renewal terms: 39% of firms got one comparative quote, 31% conducted a more extensive tendering exercise by getting quotations from three or more insurers.

Given the importance of this spend, the extent of industry and compliance change, and insurer volatility over recent years we were surprised that the number of firms not getting any alternative was so high.

The 31% going to multiple insurers points to firms engaging in a formal tender process on a three-year cycle, which is in line with conventional thinking and governance.

Our view is that marketing exercises should not be by rote, but driven primarily by the firm’s business objectives and future plans - especially if a major change, for example an acquisition, may feature. Insurer appetite (by firm size and activity) changes regularly and also has a bearing, particularly as the insurer ultimately needs to deliver the claims promise.

Whilst there is a place for tactical benchmarking exercises, our approach is to set out a renewal broking strategy specific to each firm’s objectives, informed by our in-depth knowledge of the type of business each insurer desires.

"A" credit ratinng - does it matter?

Respondents stated that over a fifth of quotes presented came from unrated insurers - for a handful of firms the only terms available were from unrated markets.

Of firms presented with “unrated” quotes, over 40% stated they would not use unrated insurers. Of the rest, most considered but rejected the unrated option, despite the premium being cheaper. A minority took the unrated quote, arguing the premium saving was too large to ignore.
 
With the abolition of the Assigned Risks Pool (ARP), unrated insurers arguably present a valid “last resort” option for firms with no rated alternative, although our survey suggested very few with this particular need.

Access to a lower premium, especially where savings run to the thousands, is an obvious siren-call and shouldn’t be easily dismissed. Such options need to be carefully evaluated and risk assessed by the firm. If you do consider an unrated insurer, the most obvious questions relate to the implications should the insurer fail, which include:

  • Can you access (and pay for) replacement cover if your insurer fails during the current policy year? Where is this on your risk register, and in your budget?

  • Do you have reserved, but unsettled, claims from a prior policy year? If so, you rely upon the solvency of that year’s insurer to (a) continue to defend spurious or inflated claims and (b) fund settlement costs of valid claims. This is a long-term exposure to your business again to be planned and budgeted - as for example previous clients of Lemma now realise. Remember, claims notified against you today can remain open for many years and come to bite long after a premium discount is forgotten
  • Can you do adequate “due diligence” to give satisfaction of insurer solvency? Whilst an “A” rating is not an absolutely guarantee of an insurer’s long-term stability, it does show that the insurer has faced rigorous, independent, external scrutiny on its financial performance, claim reserves and solvency. As a broker, we can’t see a credible due diligence approach that would enable us to vouch for unrated insurers in the same way

Beyond the question of insurer insolvency, additional considerations include:

  • What you get for your money – are you confident in the claims service you will get, or the response to developments in your business?
  • Your reputation in the market, with staff, and potentially when tendering for major legal services contracts where your insurance programme could come under your potential customer’s scrutiny

We were somewhat bewildered by brokers presenting unrated quotes to firms who would only consider “A” rated markets. This suggests either lack of knowledge about the customer, or a broking approach based solely on “cheapest price”.

Should the RSA stop unrated insurers being "Qualifying Insurers"?

A whopping 94% of our respondents think so – 59% saying the SRA should insist upon a security rating as a criterion for QI status, the other 35% stating the restriction should be to “A” rated markets only.

The survey results are congruent with our views, and echo other extensive market commentaries on the topic.

Market changes #1 - Alternative Business Structures

13% of our respondent firms indicated that they would apply for ABS status in future, a material number given the current adoption rate, with a further 34% yet to decide.

Whilst our survey didn’t establish a timescale, more firms are considering ABS (or yet to rule it out) than we previously anticipated. The business mix of an ABS and regulation of the various elements present a number of important challenges in structuring an overarching indemnity insurance and risk management programme, which in our view need to be understood before committing to transition to an ABS.

This insight is an important one, and we have developed our broking proposition in response.

Market changes #2 - renewal date intentions

 

67% of respondent firms intend to retain 1 October as their renewal date, the other 33% planning to take advantage of the new rules and move their renewal date to a time that is more convenient for the firm. Dates varied through the year with only a few stating calendar year end.

 

The number of firms sticking to 1 October is in line with our expectations. For those intending to change the likely wide distribution of dates plays exceptionally well to our promise of a dedicated year-round service, rather than considering it “job done” on 2 October.

 

The broker "report card" - must try harder?

50% of respondents stated they have been kept well informed on regulatory and PII rule changes. The other half wanted more, with 20% stating they had no advice or guidance at all, or had to be self-sufficient in keeping abreast of developments.

Conclusion

PII is one of the most important – and most expensive – purchases a law firm will make each year and it is crucial that the right approach is adopted.

Whilst an important consideration, price should not be the sole determinant of choice. Firms must take into consideration other key factors including their insurer stability and broker support when making their decision.

Further commentary on our survey can be found at:
www.lawgazette.co.uk/news/law-firms-paying-over-odds-pii

Wesleyan’s Professional Indemnity Team can be contacted on:

0800 107 8171


PIIenquiries@wesleyan.co.uk

This article is a general guide and is not a substitute for professional advice. No responsibility can be taken for any loss incurred by anyone acting or failing to act on the basis of this article.

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