It was an eventful summer in the insurance industry, particularly for those concerned with Solicitors PII. Not only is Brexit fast approaching, there was a Solicitors Regulatory Authority (SRA) consultation on Professional Indemnity Insurance. In addition to this, a number of insurers have decided to exit the market place, no longer writing both compulsory primary insurance along with the first excess layer placement up to £10m in coverage. Perhaps this is of no coincidence, given the last sentence but there has also been a rise in both the severity and complexity of claims being reported, which has a potential to impact across multiple layers of insurance.
Brexit
Naturally, there is an uncertainty in the air with regards to Brexit and how that could impact us all. From an insurance only perspective it is important to appreciate that many of the leading participating insurers are committed to providing insurance solutions to the Legal Profession of England and Wales. As such, insurers have made a number of plans with Brexit in mind, regardless of whatever terms the UK will have in place with the European Union.
Severity and complexity vs frequency
The renewal season started a little later than usual this year. If insurers were prepared to offer them at all, early or easy renewals were invited much later than in previous years, which naturally had a knock on affect to the season as a whole.
This year we've seen an increase in the severity and complexity of claims made. Although the frequency remains relatively modest compared to previous years, the current claims environment can no longer be described as benign. As these large losses manifest, insurers of both compulsory primary and excess layer insurers have experienced a series of complex notifications, which could negatively impact their balance sheet when or if they crystalize in the future. This development in the claims environment creates does call into question whether it is appropriate at this stage for the SRA to contemplate proposing a reduction to the compulsory limit of indemnity that is required when considering recent claims made against members of the profession.
Market conditions
Recent results from Lloyd's of London show that non US Professional Indemnity Insurance is the second worst performing class of Insurance within Lloyd's with syndicates running at significant losses. As a consequence, Lloyd's has challenged its syndicates to re-evaluate their business plans with a view to returning the class to profit. Those syndicates that cannot demonstrate this may not be permitted to write PII going forward.
This increase in unprofitability combined with several other Lloyd's Syndicates exiting the Solicitors market has had a knock on affect for those insurers who remain.
This has meant that a number of insurers have stopped writing the first excess layer up to £10m above the compulsory limit, often described as the working layer. Due to the increase in severity of losses impacting the market it is of no real surprise, as all the premiums collected from numerous years could be wiped out by receiving one loss. Lack of willing capacity, and an increase in claims activity rates for the working layer have increased across the market. The average rate increase in the first excess layer was just under 22%, regardless of whether there had been any claims activity. We expect this to only be tip of the iceberg and expect this layer to continue to experience further rate increases. That said, this increase is a realignment to historic pricing for this layer, until this year, for the past three there was a significant erosion in costing of this particular layer.
In August, Libra Managers, which provided PII to 20 of the top-200 law firms withdrew from the market. The insurer confirmed it would not underwrite any new business from 1 October. This left 10 of the 20 Libra insured firms who continue to renew on the 1st October just six weeks to find a new insurer. In addition to this, Aspen also announced that they would be exiting not only solicitors PII but PII altogether.
It's not all doom and gloom
Despite these market developments, there is still plenty of choice and quality insurer capacity available for the compulsory primary limit of insurance, especially for smaller practices.
As an independent broker we have extensive access to many of the leading insurers, which benefits our clients regardless of their size or profile of their practice as we have numerous options available for them. This helps our clients obtain appropriate coverage at a competitive cost. This is evidenced by the fact we place business with the majority of the leading participating insurers, with placements across our portfolio with no fewer than 16 different of the participating insurers in October, along with our client retention rate of 97.6%.
Taking an aggregated view of our clients that renewed in October, the rate applied to their fees for the compulsory primary limit actually reduced by 4.11% at renewal. This doesn't mean that premiums went down necessarily as for a large majority of our clients their fee income grew, but the rate applied to their fees reduced. Interestingly, whilst we continuously present our clients with a selection of insurers to choose from, only 4.5% of our clients who renew at 01/10 elected to move to a new insurance provider.
In light of the uncertainty described above, almost 20% of our clients took extended periods of up to 2 years in duration. Commitment to renew endorsements was also introduced. Of the 120 new clients we were delighted to welcome this year, 11 different participating insurers were involved in these placements and 40% of these placements were for longer than 12 month arrangements.
M&A
There continues to be a lot of M & A activity across many size segments of the Legal profession. The Lawyer and Gazette continuously providing us with evidence of this. Whilst there appears to be considerable consolidation, both locally and internationally there is also a continued emergence of new start-up firms, particularly with the emergence of more “niche” or “specialist focussed practices.” Despite considerable consolidation, due to the volume of new start-up practices the number of law firms operating in England and Wales continues to remain similar.
Cyber Risk
From an emerging threat and risk perspective, Cyber-attacks are undoubtedly on the increase. With cyber-attacks posing a growing threat to many professional service firms, insurers are asking more questions. The implementation of GDPR last May has meant there is now more general awareness and focus on how companies use and protect their clients' data as well as how they report and recover from a data breach. Yet take up of Cyber cover is still relatively modest across the Legal profession.
Crystal Ball
What does the future hold? Nobody knows for certain, however there are a number of indicators that the market may harden. Fortunately, for Lockton clients due to our extensive access and relationships with the leading participating insurers we can shield them from some of the effects, but certainly not all.
Not only can we help with simply pricing protection, but perhaps more importantly we are here to advise and educate our clients on how best to prepare presentations for insurer's consideration which could prove to be invaluable in a hardening climate.
We do anticipate further rate and premium increases in the working layers up to £10m. This is largely driven by both shrinking capacity largely due to an increased volume of complex and severe losses being incurred.
The outcome of the SRA Consultation could cause some confusion, however upon talking to a number of the leading insurers, many will listen to what their clients wish for. If the majority of the Legal profession wish to maintain the status quo in terms of current limits, then they will be looking at providing insurance solutions accordingly. The proposed amendments to limits are quite clearly inadequate for most practices particularly when you consider the aggregation clause that is contained within the wording.
Due to the level of uncertainty in the market place, easy and or early renewals may become more attractive to firms.
Whatever your desired path for your forthcoming and future renewals, our recommendation is to act early, do not to delay in your renewal preparations; the last minute “deals” that some firms may have become accustomed to may no longer be available, and if the October season is replicated or worsened then premiums to be offered may actually increase the closer you get to renewal.
For those of our clients who renew early in the New Year we will be contacting you soon to begin preparations, but if you would like to act now then don't delay and speak to your Lockton representative or myself at the earliest convenience.