Summary of Insurance Times article first published 01 December 2022, reviewing the October 2022 PI Insurance renewal season
According to a leading broker recently interviewed by Insurance Times, there were signs of the PI insurance market stabilising in the October 2022 renewal season:
Feedback highlighted that rating levels stabilised, and insurers demonstrated an appetite to grow their accounts with a willingness to ‘consider and engage’ with the right firms. One can deduce that this means those firms who were within particular underwriting appetites, and who presented themselves in the best light, setting them apart from the competition.
The article went on to say that insurers remained extremely selective, and were only willing to engage with those law firms who were able to demonstrate they were a quality firm, perhaps with low or no claims, specialist in their field and very importantly, with a sound financial footing (more later).
The broker said that ‘many firms were offered terms at the same level as 2021, despite the inflationary environment we are currently in (where it would not be unexpected to see premiums rise by 10% at least), and a volume of early renewal terms were made to those firms able to meet various pre agreed criteria.
In immediate prior years, it was not uncommon for firms to experience rating increases of 20% or more. So, whilst October 2022 did not see rates falling, any rate hardening has been at a low and managed level for well managed firms, with some signs of levelling off in the market.
Market Entrant Developments
For some time, there have been rumours of new market entrants arriving to de stabilise the upward premium trend and ‘buy-in’ business. This clearly has not happened, and moreover there has been a trend of authorised insurers actually pulling back their support for the solicitors market over the last two years, with some refusing any new business and closing their distribution routes down to a sole broker. In turn, this has led to many law firms simply renewing with their existing insurer.
However, the leading broker interviewed said that they expect to see ‘increased carrier choice in the not too distant future – as the market softens and more insurers look to grow their portfolios, law firms should start to enjoy a stability that has been missing in prior years’.
Law Firms’ Financial Health Crucial to obtaining insurance
A stand out feature of the underwriting process has always been assessing a law firm’s financial health – needing to see and understand their accounts, their balance sheet to know that they are in good health and capable of withstanding premium payments, potential run off cover costs, and importantly excess deductibles in the event of claims.
Firms that have a negative net worth, with liabilities outstripping assets, insufficient fee income to cater for the partners and staff roster, are almost always an automatic decline for insurers. And so the ability for firms to market themselves to other insurers, disappears – they are left with the incumbent insurer’s renewal terms on a take it or leave it basis.
So now, in the current economic climate, its more important than ever to present a risk on the best financial footing – to have accounts brought up to date (work with accountants ahead of renewal to at least have a balance sheet and unaudited management accounts ready to accompany a proposal form) along with your 5 year confirmed claims experience, and a story to explain any financial deficiencies.
Run-Off Risk
Any insurer signing up to the SRA’s minimum terms and conditions of participation does so on the basis that the insurer would need to offer a six year run-off period of cover in the event that an insured firm ceases trading during the policy period – whether that firm does so on a voluntary basis, or regrettably on a winding up basis. And so when insurers are considering which risks to offer terms on, they look to ensure that the firm can meet its financial liabilities, both now and in the future, with an eye to the potential insolvency of that law firm – as the insurer has to provide the six year run-off period irrespective of whether they have received the premium or not.
In summary – It’s about presentation
The optics in presenting your risk to insurers is vitally important. The following is a checklist we suggest to help get the best terms possible:
– Timing – start the process early, aim to be 7-8 weeks ahead of renewal date
– Financials – work with your accountant to bring your financial statements right up to date; there is no point in presenting accounts that are a year out of date. Use up to date balance sheets and unaudited management accounts
– Proposal form – use a long form providing as much detail about the practice as possible
– Claims experience – obtain (from your broker) details of up to date 5 year claims experience
– Supporting information – If financials are weak, explain. Help the insurers understand what’s going on – The more information provided, the better.
– Be realistic – UK inflation is running at 11% (at Dec 2022) and the insurance sector is not immune from this – be prepared for some cost escalation
Info source: Insurance Times article published 01 December 2022
