The PII race: get fit or be left behind
Some thoughts and guidance from LawNet CEO, Chris Marston (9 minute read)
I’m guessing you wouldn’t consider entering an Ironman triathlon – the peak of human endurance involving a 2.4-mile swim, 112-mile cycle ride and a full 26.2-mile marathon – unless you had planned, trained and prepared for the race.
You may think that’s a strange thing to raise in a journal devoted to legal analysis and practice management, but the Ironman challenge has much in common with this year’s professional indemnity market for solicitors – it’s merciless.
And it takes time to prepare and to reach peak condition for any major challenge.
Conveyancing claims continue to hit insurers’ bottom lines and cybercrime is becoming increasingly sophisticated and prevalent. Insurers are concerned that a post-pandemic recession could further increase the number and severity of claims.
These are all factored in when underwriters set their premiums; and after a benign period when many new players pushed down the cost of insurance, market capacity and appetite for new business has reduced or narrowed.
The background to the hard market we’ve seen since 2018-2019 is set out clearly in statistics presented at the recent Law Society law management section conference.
These showed claims exceeding premiums over the preceding ten-year period – and did not include data from insurers who had left the market, whose experience may well have been worse. These numbers, and the thematic review undertaken by Lloyds of London, forced professional indemnity insurance (PII) insurers to address the issues.
Insurers are asking more searching questions in relation to risk management, financial stability and supervision – especially with remote teams now a major feature in so many firms.
They are setting limits for conveyancing work at individual firm level rather than on a portfolio basis, meaning they just won’t offer terms to some firms. And it has become fairly common for insurers to ask for personal guarantees from partners to cover the run-off risk that insurers face when a firm ceases to trade.
For most firms, PII is the biggest single expense after staff and premises. Despite this, and the tougher terms of recent years, many firms still view renewal as a standalone administrative process, rather than something that flows from a year-round focus on learning, attitudes, processes and continuous improvement.
Insurers want to look behind the façade to understand how you operate, interrogating not just how you approach risk, but everything from your balance sheet to how you manage employee wellbeing – because people under stress are more likely to make mistakes.
It’s about your firm’s all-round resilience and fitness to perform in today’s challenging market conditions.
Preparing your proposal is the one chance you get each year to demonstrate to brokers and underwriters, in the frenzy of a busy renewal season, that your professional indemnity risk profile is attractive, that risks are well-managed and that you are alive to the changing risk landscape.
LawNet has the largest group indemnity insurance scheme in the market, placing more than £1bn of limits for members.
To deliver on this, we are in regular conversation with the people responsible for our group insurance placing – at brokers Marsh, lead underwriters QBE and co-insurers Sompo and Axis – as well as the risk management, compliance and quality specialists who support our network.
This helps drive the guidance we give to our member firms and it tells an interesting story as we emerge into the post-pandemic world.
Understanding the market
The pandemic has been a tough experience in so many ways and some firms may not survive, making insurers understandably cautious about covering those with unstable financials, and the potential hit of covering the six-year run-off if the firm fails.
Thanks to the stamp duty holiday, we have seen a boom in the residential housing market and a consequent rise in conveyancing, an area some firms may have tried to reduce in response to the high level of claims and resulting cost of insurance.
But all conveyancing departments are busy in this climate and the likelihood of a future spike in claims is affecting underwriters’ thinking now.
The other major factor for this year’s renewals is in the cover for cybercrime and it’s vital to keep up to speed as this aspect of fraud matures.
The way such risks are covered is being nailed down and could spell financial ruin for firms who find losses are not covered. A key aspect of this is so-called ‘silent cyber’.
Unlike standalone cyber insurance, which clearly defines the terms of cover for cyber risk, many traditional indemnity policies could theoretically be assumed to provide cover for cyber losses in certain circumstances, without expressly naming the risk.
As insurers found themselves paying out for a risk they had not intended to cover, the Prudential Regulation Authority and Lloyd’s made it obligatory that all insurers revise their policy wordings from 1 January this year to spell out whether cyber risk was included or specifically excluded.
While there is a dispensation to the Law Society until October to allow for consultation with stakeholders, change will come into force after that.
In line with the Solicitors Regulation Authority’s (SRA) minimum terms and conditions (MTC), we can expect third-party cover to be expressly included, covering claims from clients for losses incurred and reflecting the role played by firms as custodians of client funds.
However, the potential losses from first-party incidents, which were never covered by the MTCs, are likely to require separate cover.
The ramifications of first-party incidents – perhaps a staff member inadvertently releases malware into your servers, shuts down systems and allows hackers to access client data – are huge, such as business interruption, public relations, crisis management, ICO data breaches.
If you’re not up to speed on this issue, I’d recommend the primer produced by Marsh on the topic, “Silent Cyber” – Frequently Asked Questions.
Against this complex backdrop, James Graham, vice president in the Lawyers Practice Group at Marsh, has highlighted the outcomes of the April season.
“While not as large as the October renewal, it is a good indicator of what the market is doing and what to expect,” he explained. “We have seen average rate increases of 15-30 per cent in primary layers, with insurers increasingly using co-insurance to limit their exposure, where in the past they would have provided 100 per cent of the limit.
“This means you have to get lead terms in place and then try to find other insurers to take up the balance, with no guarantee they will agree to the terms, which can cause uncertainty and protracted negotiations.
Graham adds: “Alongside, we have seen the level of excess reviewed, and in some circumstances increased, and personal guarantees demanded. The range of increases were broad, with good risks treated more favourably, and others experiencing much larger premium corrections due to their claims record or risk profile.”
Co-insurance certainly isn’t a bad thing. Our group scheme is founded on this principle, in a planned position taken some years ago to give stability and security to our members.
Unlike the broader market, we have a minimum cover requirement of £10m for firms, not the minimum £2m or £3m required by the SRA for unincorporated or incorporated firms respectively.
Our primary layer is led by QBE, with two long-term co-insurers who agree to follow their lead and entrust them with the underwriting process.
This is a real strength of our group scheme, in contrast with the experience of firms where their brokers face the challenge of seeking partnerships between insurers who may not have already established a protocol for collaboration and risk sharing.
Our members have benefitted from the higher primary layer by avoiding the significant cost increases seen by others seeking to top up from the minimum SRA requirement, as well as achieving a quality of cover greater than others are likely to achieve.
Preparing to go to market
Planning is one of the most important aspects of managing professional indemnity insurance and while you may not have access to a group scheme, where this is done on your behalf, you can adopt the principles of preparedness, learning and communicating – and find a broker who aligns with that approach.
Through our member learning and development programme, we give firms access to structured training with content developed by our brokers and underwriters. It means there is a real relationship founded on communication and understanding.
Rather than being remote, once-a-year suppliers, our brokers and insurers are part of our community, guiding firms on where risk lies and how to combat it.
While our group insurance scheme allows each member to pay a premium which reflects their individual risk profile, they all benefit from the network’s collective buying power.
But that power is not just the sum of the placing, it comes from underwriters knowing that LawNet members have access to a range of risk management tools through the network and that all firms must maintain exacting quality standards.
A quality mark is a good place to start, if you don’t already have one. We require every member firm to achieve and maintain our ISO9001 LawNet quality standard and this accreditation is not a check-box exercise.
A great example of its true value was evident last year when the pandemic hit. Our quality standard requires firms to have a business continuity plan, and to test it annually to keep it relevant. While few may have planned for a global pandemic, firms are better placed to respond to threats and rapid change.
Not surprisingly, excellent risk management is encouraged by insurers. Our lead insurers QBE have developed a tool on their QRisk platform which enables our members to assess where they are on the journey towards a true risk culture.
This is where risk management lies at the heart of the firm and everything that everyone does, rather than being something that concerns only those with direct risk management responsibilities in the firm.
And for anyone who thinks that the insurer is the main beneficiary of this approach through reduced claims, we see our member firms counting quantifiable returns on their risk management strategies, which extend well beyond holding down PII premiums.
It can help maintain professional reputation while avoiding the trauma of fraud and cybercrime; it can help firms focus on clients who will pay on time and to seek out the most efficient suppliers; and it can also improve staff morale and help to attract and retain excellent employees.
Attempting an Ironman triathlon may not make it into your diary for 2021, but there’s every reason to get your firm into peak condition in readiness for the next renewal – and those that follow.
Top tips to prepare for PII renewal
1. Start early – Get submissions to your broker in plenty of time. As a minimum this should be two months. Our LawNet members must get their proposals in by mid-July, nearly three months before. Allowing time to discuss any queries and for insurers to reflect will always play to your advantage.
2. Spend time on your presentation – Leave no stone unturned as gaps or incomplete information could see your proposal rejected. And remember, the proposal form is a start point, not the end of your submission. You can add value to your pitch by including relevant information that paints a more vivid picture and is easily digestible, such as process diagrams.
3. Show how you learn – Demonstrate how process is adapted in the light of experience. We ask our members to do an overview on the risk management processes at the firm and how their frameworks limit risk. For example, when a claim occurs, what is done to prevent recurrence? If a trend is detected, what is done to tackle it?
4. Pandemic performance – This year more than ever, insurers want to dig below the surface. They want to know how you have operated through the pandemic, in detail. While last year’s renewal was about operational and financial stability issues, it is the bigger picture that now needs to be tackled, such as employee wellbeing and staff supervision and training.
This article first appeared in Solicitors Journal.