Covering the bases
What will underwriters be most interested to learn about your firm this renewal season? Brian Boehmer, partner at PII specialist Lockton, offers insight into the state of the market.
The Spring renewal season is underway, and though there are signs of an improving professional indemnity insurance (PII) marketplace, law firms need to guard against complacency in the weeks ahead. Despite an increase of appetite, underwriters will remain cautious with a studious eye on the state of the economy. Brian Boehmer says: “History tells us that if we fall into a dark recession, which is a possibility, there will be an increase in claims activity, so insurers have to make sure to cover their costs.”
Flux and fluctuation
Inflation, too, is exerting its upward pressure on premiums, though Boehmer suggests that the risk exposures are increasing faster than the premiums are – as has been the case over the last two decades. He says: “If we look at figures from the Office of National Statistics, the average house price – a useful benchmark for asset values – has increased three and a half times since the open market began in 2000, which has a bearing on law firms’ risk. But insurance premiums have not increased at the same pace as the risk compound.”
The most substantial jump came in the wake of the pandemic, when the value of claims actually exceeded that of premiums collected – forcing insurers to implement steep pricing corrections across their portfolios. Rate increases won’t be nearly as high this renewal season, says Boehmer, who describes the current state of the PII market as being “in flux.”
Having corrected itself after the pandemic, the market is expected to benefit from new players and capacity this year, though unfortunately not in time to positively impact April renewals. The current PII landscape remains particularly challenging for certain segments of lower-income law firms that engage in high-risk work. “They have options, but not as many as practices with higher fee incomes, low-risk or diversified practice areas and a history of infrequent claims,” says Boehmer, who also notes a degree of regional bias – firms in the South typically deal with higher asset values and can consequently be less attractive propositions for underwriters due to the increased potential risk.
For all practice types, one trend that is gathering momentum is co-insurance – where two insurers share the risk and reward of covering a particular firm. According to Boehmer, this is a popular option for insurers with growth ambitions – they can reach a wider share of the market while minimising their exposure, albeit at the cost of sharing the rewards. Given the historical correlation between recession and claims activity, this is a price many are willing to pay.
Movements like these might create a more active insurance market and give firms and brokers some negotiating power – provided they approach their applications with the necessary rigour. Underwriters will be putting practices under heavy scrutiny, particularly if the latter are subject to recessionary pressures.
Checks and balances
Boehmer expects that financial health will be in the spotlight, not just of firms but of their clients as well – if a firm’s clientele consists of businesses that are directly affected by ongoing geopolitical or economic circumstances, that significantly increases their risk profile.
Another concern for underwriters is sideways exposure. Boehmer says: “If there is a single mistake on a particular file – the error could end up being repeated every time the file is duplicated. Litigation and conveyancing are some examples of areas that are particularly vulnerable to sideways exposure, and insurers will be particularly vigilant about this.”
“Supervision and protocols more widely will be under scrutiny – insurers will be mindful about how workloads have been and continue to be managed amid high conveyancing volumes, as well as the health and wellbeing of associates during these periods. Cyber insurance policies are also a plus when it comes to PII, though these need to be supplemented with strong internal security measures such as multi-factor authentication to access systems and data – particularly in hybrid working models.”
And, continuing a trend from the October renewal season, some insurers are likely to introduce partner guarantees for firms that specialise in financial mis-selling. Boehmer says: “There are question marks around the moral intentions of some practices, and concerned insurers are asking for a partner or owner guarantee to protect themselves from any potential fallout and/or run-off exposure”
Best foot forward
It’s clear from the level of scrutiny that insurers are being very cautious about where to deploy their additional capital. As such, firms not only need to have stringent risk management strategies in place, they should also take control of the narrative being formed about their practice.
Boehmer says: “We can all agree that first impressions last – once an opinion is formed, it becomes very challenging to reverse. Underwriters have an appreciation of risk, but they are insurance professionals and not lawyers – they could possibly form an incorrect view of a firm, which would unnecessarily complicate negotiations.
“Firms can head this off by including in their application a complementary note – a brief document that clearly educates the insurer about their practice, complete with the type of work undertaken and the risk controls in place. Brevity is crucial – I can probably state on behalf of every underwriter in the market that they don’t want to see an office manual with every policy and procedure at a firm. But a concise, data-backed overview that can outline why a firm is less likely than direct peers to face a claim can help ensure that underwriters’ perception of the practice is based on fact.”
Boehmer equates a complementary note to a shop window, and lauds it as an opportunity for firms to proudly display their accomplishments. It can be a time and resource-intensive task to prepare such a presentation, but subsequently it just needs minor adjustments each year and can secure a positive outcome to one of the most important annual purchases made by law firms. The end goal is to have several insurers competing to cover a firm, which can certainly yield favourable terms.
Tripartite relationship
A crucial part of a broker’s role, says Boehmer, is to make sure that firms are putting their best foot forward. “We’re not postal workers – it’s our job to read and sense check complementary notes and give firms feedback when required. A good narrative can help us negotiate a good deal for our clients.”
And there is far more value on offer from brokers such as Lockton. Boehmer describes the tripartite relationship between firms, insurers and brokers. Firms might well benefit from having a direct line of communication with an insurer – they can understand exactly what is required of them to build a good application. But, equally, a direct relationship can become a hindrance if the two parties are not on the same page – in the event of a claim, for instance, if a firm isn’t happy with the strategy being adopted by the insurer. Or, if a big insurer with multiple clients moves in a direction that doesn’t suit an individual client.
“This is where an intermediary can use its leverage to change the dynamic and either challenge the insurer or reassure the client that other firms are going through similar difficulties. We can educate clients about how to minimise the impact of economic developments, while also offering access to a wider market, which puts them in a stronger negotiating position. As for our relationship with insurers, this extends beyond renewal periods – we have mid-term reviews with underwriters that can help us speed up the process of renewal when the time comes.”
Brokers offer expertise with a service mindset, which can be of tremendous support for firms at a time when the insurance market remains in a state of change and uncertainty. And to end on a positive note, Boehmer does see a more active, competitive PII market on the distant horizon.
