The 2016 Professional Indemnity renewal has just completed for the majority of Solicitor firms in England & Wales. 3 years after the move from a single renewal date, and over 60% of firms continue to prefer a 1st October renewal.
Lockton, one of the largest specialist professional indemnity brokers in the UK market, has further increased market share. Our rigorous commitment to A-rated markets, several exclusive markets, robust broking, and ongoing investment in our client service proposition, has ensured that we have delivered excellent renewal terms for all our clients, from sole practitioner, to magic-circle global practice.
We are therefore particularly well placed to report on the market dynamics and trends evidenced in this latest solicitors renewal season.
October 2016 Renewal in focus
Headline statistics from this renewal 'season' are:
- Soft market means rates reduction for many: Solicitors PII premiums (for the complsory primary layer) are anticipated to total £225m , down 12% from approximately £255m in 2015.
- More firms move from 1st October renewal: 35% of firms (according to latest estimates) now renew their PII away from the traditional renewal date of 1st October, with Feb-May being the most popular alternative period.
- Increasing focus on fraud and cyber risks: the increased incidence of cyber and telephone frauds has led to more questions for firms regarding their information security and fraud prevention measures.
Benign market conditions with competition from new A-rated insurers...
As predicted, there was a 'soft' market for solicitors PII in 2016. As recessionary claims post 2008 continue to recede, the majority of established A-rated markets have been able to reduce rates for 'good risk' firms.
Our analysis of the renewal statistics indicates that the vast majority of firms benefited from rate reductions, unless they were already well below the 'technical price' calculated by underwriters.
With the availability of sustainable low premiums, there was less of a move by firms to 'unsustainably low' premiums offered by some insurers, meaning that there were fewer switches of insurer.
... but some established insurers stand firm on rates
Some insurers, notably Zurich and AIG took a rigid stance with their renewal portfolios. Despite what else was going on in the market they did not react to other insurer's rate reductions.
Consequently, this has resulted in both these insurers losing market share to Insurers that continue to be in 'growth mode'; these include Pelican (who write on behalf of Great Lakes), Endurance, CV Starr and Hannover.
Co-Insurance increases- providing wider range of insurance options for clients
Co-Insurance (where more than one insurer shares the risk on a particular policy) has become more prevalent than in previous years. The advantage of co-insurance, other than spreading the risk for insurers, is that increases the number of insurers interested in considering a firm.
Large firms, involved in high value work, such as Corporate/Commercial, Commercial Litigation, or High Value Property are generally considered good risks, but the potential quantum of any claim that does arise can be prohibitive for some insurers.
Given the increase in claims severity, it has become an attractive option for insurers in respect of firms undertaking particularly high value work. Lockton has worked on a significant number of co-Insurance programmes at this last renewal. Taking this 'different' approach enabled us to attract more Insurers thereby increasing the competitiveness of premiums on offer.
Extended Policy periods an increasing trend
Extended policies for periods up to 18 months have become a popular feature. This allows firms to 'lock into' an underwriting rate for a longer period than normal, thereby providing greater certainty for an extended period.
An ancillary benefit , where insurers are prepared to continue to offer longer-term policies, is that there will be a little less paperwork - as the renewal process comes around just twice every three years - although you have to be comfortable with obtaining the necessary data at different stages in your firm's economic cycle.
A number of firms have been attracted by an offer of a Long term Arrangement (LTA). In summary, insurers provide a 12-month policy with an fixed agreement to renew in 2017 at the same rate as 2016, provided:
- Fees have not increased by more than a given percentage (typically 5% to 10%)
- Work profile remains similar
- The firm does not merge or acquire another practice
- Claims to not exceed an agreed amount
The soft market of the past few years has had a significant impact on unrated insurers. These insurers came into the market when it was hard, with rated insurers quoting very high premiums which were beyond the economic reach of some firms.
However, history will show that claims have caused significant distress to many insurers over the years, not the least of which have been the unrated insurers. We have seen many cut-price insurers fail in recent years – including Quinn, Lemma, Balva, ERIC and Enterprise. Elite, one of the last remaining unrated insurers, also withdrew earlier this year citing the increased incidence of fraud and unsustainable premiums.
We have not seen the emergence of further unrated insurers to fill the gap left by these firms, but this does not seem to have produced a reduction in capacity, as a number of reputable rated insurers have emerged in the last two years.
Claim numbers down
Whilst the claims environment has improved since the recession, there are concerns that this may only be short lived. Frequency may well be down, but the severity of losses especially from commercial work is on the rise. In view of this, there cannot be much more room for rates to continue reducing.
Furthermore, with the emergence of the cyber related claims, which crystalise much sooner than a traditional negligence claim, the savings we have seen this year may only be temporary. Therefore, LTA's and extended policy periods may well be prudent to consider at your next renewal.
Those firms who presented themselves as well run firms, who could demonstrate to Insurers that they have good financial controls, along with a robust approach to risk management, a good or improving claims records, had the best chance of obtaining cover at the most competitive cost.