The cost of professional Indemnity Insurance (“PII”) is soaring and the traditional renewal date of 1 October is fast approaching. There’s been an increase in those looking to pay PII in instalments, indicating difficulties in affordability. It’s essential for law firms to think early about managing increasing costs and cash flow and to seek appropriate advice for assessing the available options where such difficulties are forecast.
The Exodus of PII Providers
A Lloyds of London review in 2018, following significant insurance losses, saw many PII providers withdraw from the market. In 2020, two thirds of law firms faced no claims. However, the third that did face claims cost the insurers more than all the premiums paid.
Premiums up, Revenue down
In August 2020, the Law Society warned that the combination of COVID-19, Brexit and an already hardening insurance market meant firms were facing a +30% increase in their PII premiums. Market specialists expect further increases this year. Those with poor claims histories will expect to pay even more, against a backdrop of COVID-19 impacted revenues down on average around -10%.
Size Matters
As costs rise, large firms can take the hit, but smaller high street practices are being forced to sell or merge or go out of business, with those surviving having to try to pass on costs to clients.
Especially hard hit are general practice firms at the small end of the legal market, for which insurers are showing a clear lack of appetite. Firms relying on lower-value personal injury claims, conveyancing, property development, or probate may face large excesses or the more fundamental problem of availability when they come to renew.
A Higher Bar
Under these deteriorating conditions, nearly all insurers are rigorously examining the last 3 years’ accounts for a practice – asking challenging questions around assets, liquidity and ongoing financial viability. Insurers want to understand how firms have responded to the pandemic, and what support they required. Most insurers have placed a greater spotlight on conveyancing work, with some applying tougher upper limits of exposure.
Deadlines for PII
If, by the deadline for renewal, a firm can’t obtain PII, it will only have a further 30 days to secure cover and if unsuccessful, it will have to close, or merge. Principals of law firms immediately become under great pressure to find a solution and at the same time need to avoid disciplinary action that would prevent them being permitted to practice.
Merge or Rethink?
For many small firms a merger with a like-minded law firm seems like an obvious solution. Whilst it would be ideal for the firm willing to merge to be a “successor practice” with PII cover, many potential merger partners will insist that run-off cover is in place to protect the ongoing business from claims. Run-off cover can be expensive and may have to be paid by the principals of law firms personally.
A Brighter Future?
The good news is that increasing premiums could lead, according to some analysts, to new entrants and an eventual softening of the market. As all the above issues take their toll, innovative lenders will sense an opportunity, developing new products and providing greater competition. However, law firms will have to manage the current pressures until this improvement materialises.
If you would like to talk to us about the different options and about any aspect of what you have read please get in touch with one of the team.
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