How can firms ensure professional indemnity insurance doesn’t break the bank?

Mike Stevenson, managing director at Iceberg, says the cost of renewing professional indemnity insurance is unlikely to drop any time soon. But, even with the continuing coronavirus pandemic impact on SME law firms’ finances, he explains there are ways to navigate the costs.

We’re now in March, which means it’s time for many law firms to start planning for their professional indemnity insurance (PII) renewals.

Over the last 18–24 months, PII premiums for law firms in England and Wales have steadily increased. And it will also come as no surprise that the market has been significantly impacted by the pandemic, with the additional risks caused by homeworking and reduced fees reflected in premiums. The previous PII season last October was particularly challenging for the sector, as firms experienced rate increases of 10–15%, according to customer research data from Paragon International Insurance Brokers.

Especially during these difficult times, we know the cost of PII can be significant and put additional pressure on a firm’s cashflow. There are a few steps law firms can take to make the process of renewal as smooth as possible.

PII renewal best practice

Firstly, planning is key. In order to secure the right quote from an insurer, legal businesses need to ensure that they thoroughly prepare and provide as much information as they can to their chosen broker. This will help ensure that the insurance underwriter has all the information required to evaluate the risks involved. We would advise firms start the process as soon as possible to allow plenty of time for collating the necessary information and so they can be as thorough as possible in their planning.

It’s also important to explain how your business has responded to the pandemic and what measures and processes were implemented to adapt during lockdown. Underwriters will want to understand whether those processes are fit for purpose for long-term homeworking and will want to see include more nuanced elements, such as quality control around complex work.

Finally, it’s important to include your report and accounts in the original submission. Take the time to provide context around this, including explaining any bad debts and highlighting any cash reserves. You will need to show insurers what is being done to ensure the financial stability of the firm, and provide evidence that you are forward-looking.

Industry challenges

Insight provided to us by Paragon shows that one of the biggest challenges faced by insurers at the moment is capacity. This remains an issue both in PII and in the global insurance market. The uncertainty introduced by Covid-19 and its effect on the global economy, set against the context of an ambiguous Brexit, has resulted in limited additional investment into the insurance sector.

This means underwriters are looking very closely at the companies they allocate their limited underwriting capacity to. While PII rates have increased notably over the last 18 months, the level and frequency of claims remains high – this is a situation made even more challenging by the long-tail liability of those claims.

Despite increasing rates, there is no indication that any new insurer capacity will enter the market. Rates will soften again, but we don’t expect this to happen until new capacity materialises.

In terms of managing the costs of PII, firms can consider  financing options, some of which are specifically designed to help law firms meet the cost of PII premiums by spreading payments over the period of cover.