The first year of the open market for professional negligence indemnity insurance was something of a land grab, but predicts Trevor Moss, this year will be less frenetic with risk management the key to the best PI premiums available
The first year of the open market in solicitors’ professional indemnity insurance was something of a land grab with 35 qualified insurers, of which 21 were Lloyd’s syndicates, competing for market share.
The result was that the overall professional indemnity insurance premiums paid by law firms in the first year of the open market were £163m – a saving of £95m over the last year of the Solicitors Indemnity Fund (SIF).
Now that we are moving into the first renewal season, it will be interesting to see the trends that develop over the coming months. There are also a number of actions which firms should be considering if they are to ensure that their premiums remain low in the future.
It is still early days in the open market, but it is likely that the issues that will catch the headlines this year will be risk management, claims handling, service standards from insurers and brokers and whether the total number of firms falling into the clutches of the Assigned Risks Pool (ARP) will fall or rise.
Naturally the most important issues for many firms will be the absolute level of premium they will have to pay, whether it is more or less than last year, and what they can do to keep their premiums down.
There will be a number of drivers of premium levels in year two, most of which will depend on the appetite of insurers to take on more risk.
There are almost certainly some insurers which did not gain the share of the market they had hoped in 2000 and which will be offering competitive premiums in a further attempt to build up critical mass.
On the other hand, there will be insurers which have found their claims experience to be rather more painful than they planned which will be hoping to achieve higher premiums from some categories of practice.
Other issues have also come to light which may make overall premium levels harder to predict.
These are the introduction of the limited liability partnerships and the potential increase in limitation periods following the cases of Brocklesby v Armitage & Guest and Robinson v Cave.
The introduction of limited liability partnerships will only affect how premiums are assessed for the limited number of firms likely to opt for the new structure, however the changes in limitation have the potential to affect the premiums of all practices.
Qualified insurers were obliged to offer firms six years run-off provision against negligence claims after which most claims were deemed to be statute barred.
The decisions in the Brocklesby and Cave cases seem to have lifted the time bar altogether for many claims and will lead to many firms seeking extended run-off periods on their professional indemnity cover.
This will undoubtedly impact in some way on premium levels.
Overall it is unlikely that there will be any significant further falls in premiums this year and certain categories of business may find that their premium levels are rising where insurers have suffered a particularly poor claims experience.
Additionally, with many firms reporting increases in fee income of between 20% and 45% this year, this too will have an impact on premium levels.
Solicitors seeking to mitigate their premiums will be well advised to take great care in how they present their practice to insurers.
Unclear or ill-defined level of risk will be looked upon dimly by underwriters.
Those, however, that present their case clearly with clear policies to manage the risk of claims are more likely to receive a favourable hearing.
Risk management will be one of the mantras of this renewal season.
Oddly, however, firms that have spent the time and effort ensuring they have set in place management procedures to mitigate the risk of claims are unlikely to see much change in their premium level. Payback for time and effort committed now will come in two or three years’ time when the firms can demonstrate that their procedures have had an impact on their level of claims and their insurers will respond accordingly.
Our experience in advising firms on how to improve their risk management and improve their claims record has clearly demonstrated that the majority of professional liability claims are avoidable. A remarkable number of potential claims can be eliminated by the introduction of straightforward procedures to eliminate errors such as missed diary dates or delays in actioning clients’ instructions.
Over time this will mean that well managed firms will see their professional liability premiums reduced, while those with poor claims records will be penalised.
One of the surprises of the first year of the open market is how few firms failed to arrange cover in the commercial market and were forced into the ARP.
Only 41 firms were unable to arrange cover, although it is reasonable to speculate that far more than this number should probably have been forced into the ARP if the profession is to rid itself of the underperforming firms.
It was these firms that produced the majority of claims which brought the SIF to its knees.
These practices are now insured in the commercial market and the concern must be that if they continue to produce claims then this will adversely affect the insurance market.
It is only to be hoped that the ARP does its job and forces the poor performing firms to shape up or shut up shop before their poor claims records ultimately lead to premium increases which will penalise all firms.
While on the topic of the ARP, it is worth noting that solicitors are still being hit for past claims made against the SIF.
In its annual report 2000, the chairman’s statement said that “based on the figures at 31 August 2000 it is estimated that a further collection of approximately £350m would be sufficient to eliminate the shortfall”.
One area where most firms will see big changes this year is in the standard of service they receive from the insurance industry.
It is fair to say that last year the insurance market struggled to cope with the enormity of the task. Like many, we spent considerable time and effort working with the insurers to ensure that each firm was underwritten on its merits and at a level sustainable in the long term. This led to delays and a slow turnaround in quotes in some cases.
The industry has undoubtedly learned from this experience.
It has to be accepted that introducing an entire profession to the insurance market was a truly unique occurrence and this year should see a dramatic improvement in service standards across the board.
There is more to professional indemnity insurance than simply chasing the lowest possible premium.
The SIF was rightly recognised for the high standard of its claims handling and you need to be sure that your insurer can quickly and efficiently manage any claims or circumstances that you report.
Overall, we are expecting a less frenetic renewal this year, with premiums possibly up a fraction on last year.
Solicitors can help themselves by making sure that they present their firm to insurers in the best possible light.
In the longer term, practice managers can help to mitigate their professional indemnity premiums by ensuring their risk management procedures are efficient and eliminate unnecessary negligence claims.
Trevor Moss is director of professional indemnity insurance broker Alexander Forbes Professions.
