The claim drain by Janine Parker, Paragon
This article was originally featured as a column in the October issue of LPM. To read the issue in full, download LPM.
As we approach September and the final four weeks of the PII renewal season, it’s worth considering what current trends we’re seeing in the market and the potential implications, both short and long term, for law firms.
Two major insurers have recently announced their intention to withdraw from the professional indemnity market in general, while an additional insurer has specifically withdrawn from the solicitors market. What’s concerning about these events is that we’ve experienced a relatively benign claims environment over the past seven years. There have been no real systemic claims issues and it’s a strange time in the economic cycle to see three insurers reduce their exposure or pull out completely.
Why are these insurers deciding to leave the market? The logical conclusion is that they’ve not made enough profit to be able to continue to underwrite this class of business. This would suggest that the pricing levels of recent years have not been sustainable and are therefore too low. The other scenario is that they’re looking to the future and are trying to predict a potential economic downturn and avoid the fallout from that.
What’s also alarming is the timeframe in which certain insurers enter and leave the market. It usually takes around four to five years for a long tail professional indemnity book to mature and show its true claims position. The fact that some insurers are withdrawing after only writing solicitors professional indemnity for three years suggests both a pricing issue and concerns about the future.
We would normally expect to see a pricing adjustment or an increase of non-renewals from a portfolio before an insurer decides to completely exit the market. This way they could return their portfolios to profitability and potentially navigate their way through a more challenging period in the economic cycle.
What’s certain is that instability and uncertainty are not good for law firms – and given the cost of insurance, any volatility in pricing is problematic. This was seen after the last credit crunch, where losses materialised for insurers and pricing increased before new capacity saw the market drop again.
At the time of writing, responsible insurers appear to want to maintain rates or try and push a marginal rate increase. This is perhaps due to the current performance of their portfolios or that they have one eye on the future.
Either way, the pressure on pricing that we saw over the past four years is slowing down. This may be a good thing in the long term since if more insurers were to withdraw, the reaction of the market could be much more severe. This could leave firms without cover or having to move insurers at a greatly increased premium.
Firms should always look for the most valuable arrangement they can, but it must be stressed that this may not be the cheapest option. Continuity will be important should the market change, and those firms that have moved around year on year may struggle to find a supportive insurer compared to those firms that have enjoyed a long-standing relationship with an insurer. Loyalty is clearly a two-way process and insurers must be competitive, but with the spread of pricing available in the market it’s more important for firms to have transparency of the placement of their insurance and a detailed understanding of who their insurer actually is and whether their broker enjoys a direct relationship with them.