What emerging challenges are surfacing within the legal sector?
Piers Winton, executive director at Gallagher, highlights the emerging challenges that may threaten law firm performance, despite the positive outlook created by favourable professional indemnity market conditions
The current softening within the professional indemnity (PI) market continues at quite a pace. Such rate decreases mean we are rapidly approaching the rating adequacy levels of 2017 when PI was very much under the spotlight for its poor performance — a time when we experienced a significant but short-lived hardening of the market.
However, while firms continue to see rate and premium reductions, it is hoped that these market conditions can be maintained in the long term. For the short-term at least, firms should enjoy the more amenable market conditions and look for as much value from their PI insurance as possible.
The time when you were purchasing a policy alone are long gone and firms should look at product differentiators from their providers. LawInsure, one such PI product, offers firms complimentary and subsidised business, regulatory and compliance services that help manage risk.
As is the nature of market cycles, the soft market will not last forever. However, with the 2024 and 2025 underwriting years of account performing strongly at a macro level, these favourable conditions are likely to continue into 2027. That said, what emerging challenges are beginning to surface within the legal sector?
AI-related opportunities and obstacles
AI is the current challenge for firms — is this an opportunity or a hindrance? There are obvious operational benefits to integrated AI to assist with back-office processing and filing. At this level, insurers can be relatively comfortable that a business is seeking to de-risk itself from human error and speed up service, which will allow firms to better use their staff resources. Firms billing regularly tend to enjoy better cashflow and fewer complaints from surprised clients. The technology is also reasonably well established.
But what happens when AI is used to review documentation, such as a standard lease or a will, before it is passed on to a fee earner? On the surface, this might seem harmless, however the technology may not yet be fully reliable. Additionally, it could lead to poor working practices, where fee earners become overly dependent on AI and simply pass the work to the next stage without conducting a thorough review themselves.
It is this uncertainty that makes insurers nervous — if AI-reviewed documents contain an error, it is likely to be a mistake that is repeated on multiple occasions which then becomes part of AI’s learning. This could be a new, unwanted source of systemic claims for insurers, or at least a new potential exposure that underwriters will have to factor into their pricing models without the benefit of historic data to guide them.
Another unknown concern is the potential impact of AI on the development of junior staff, which poses a range of questions:
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Will it reduce the need for junior roles?
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If fewer junior staff are recruited due to AI taking over many traditional responsibilities, who will step into senior positions in the future?
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Are we inadvertently beginning the process of eroding one of our most enduring professions?
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While there is no doubt that AI brings numerous benefits and opportunities, it must be approached with caution and implemented responsibly, as it has the potential to fundamentally reshape the professional landscape — are there any other threats to the profession that are perhaps more dangerous than AI?
The impact of private equity
Private equity (PE) vehicles have certainly extracted huge sums of money from the insurance industry with great results for themselves, but with mixed results for the companies they acquire. There is a natural conflict between long-term sustainable pricing models and PE vehicles, whose sole objective is to sell that business with a positive return on investment in three to five years. Perhaps worryingly, we are increasingly seeing the PE world enter the legal profession.
While this is nothing new, and some firms have greatly benefited from outside investment, there appears to be an uptick in PE activity in the legal profession. Some of these have already resulted in some high-profile failures of long-established firms. How can the PE model be reconciled with a lawyer’s need to provide thorough bespoke advice? Granted there are some work types that lend themselves more favourably to this model, but other areas are surely in a position of conflict.
There are only so many hours in the day and burnout is yet another challenge that affects performance and ultimately claims. Is it truly beneficial for the profession and, ultimately, for the consumers of legal services when firms are absorbed into large private equity vehicles? While these entities may provide lower-cost services, they could also lead to a reduction in choice. Only time will reveal the full impact.
Managing the changes
In summary, while it is important to take advantage of the favourable PI market conditions, businesses should also strategise how to effectively embrace the opportunities presented by AI and prepare to navigate the increasing competition posed by private equity backed law firms.
The information provided in this article is for general informational purposes only and does not constitute legal, financial, or professional advice. While we have made every effort to ensure the accuracy and reliability of the information presented, readers are encouraged to consult with qualified legal, insurance or risk management professionals to obtain advice tailored to their individual needs and circumstances.
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority.
