How low can you go?
As the annual PI feeding frenzy comes to an end, John Watson takes stock and asks if rates will ever rise to more realistic levelsProfessional indemnity brokers and underwriters are taking a deep breath. A hectic three-month period has just ended, as almost 10,000 solicitors’ firms in England and Wales renewed their PI cover for the start of October.
The common renewal date, when between £230 million and £250 million of premiums are up for grabs, sparks some frenzied competition. It is a chance for good brokers to show their worth – and an opportunity for underwriters to grab a useful chunk of business.
Brian Boehmer, a specialist PI broker and divisional director at Alexander Forbes Professions, says: “Everyone chases this premium pot. It is very competitive because the whole lot is in the market at the same time. That gives some solicitors a buying power that they might not have without that common renewal date.”
The annual shopping spree means busy days for brokers, but also potentially lucrative rewards. It all started in 2000 when the Law Society decided to end the mutual Solicitors Indemnity Fund (SIF) and throw open PI to the commercial market. Insurers must offer a common package of cover to terms laid down by the Society – generous by the standards of other professions. These standard terms mean that insurers compete primarily on price and claims service, with clients dependent on brokers to steer them to the right deals.
2 + 2 = 5?
Insurers worry that the standard renewal date and generous terms mean
the whole package could be a recipe for losses in the future.
For example, payments by solicitors into the old SIF in its final year of operation were £250 million. Since then, legal fee income has risen by an estimated seven per cent each year, PI claims have grown by about five per cent a year and the compulsory limit of cover for each firm has doubled from £1 million to £2 million. Yet the total premiums collected fell to £238 million in 2004 and again to £234 million last year. On a risk- per-pound-basis, something doesn’t add up.
Many in the field put this down to the effect increased competition has on rates. Laura Day, a PI underwriter with Hiscox, says: “The common renewal date makes it easy to trade off one insurer against another.”
New insurers have come into the market, which means that even if one or two stand firm on rates, there is another willing to take an aggressive stance to win new business.
But legal professional indemnity is a long-term game. Brian says: “This is a claims-made policy. Advice solicitors have given to clients several years ago can suddenly come back and bite them.
Red alert
And the warning signals are there. Recent high-profile cases such as Hilton vs Barker Booth & Eastwood – where the same firm of solicitors acted on behalf of two different clients with opposing interests – and Hammonds vs Football League (see panel) have shown the potential for losses.
Prudent brokers are already trying to prepare their clients for when the market turns. For example, effective risk management may appear a luxury in today’s soft market, but it could pay dividends once rates harden. The broker who helps a solicitor control their business costs (insurance premiums are the third biggest cost after wages and office rents) is giving that firm a competitive advantage.
Brokers can also demonstrate their worth by offering a year-round commitment to clients, offering a contrast to those firms that pull in extra staff for the annual renewal spree, but are then thin on the ground for the other nine months of the year.
This type of attention to detail by brokers should leave their clients in a strong position for when rates turn and premiums rise. But when might that be? Laura says: “Solicitors’ PI is still evolving in the commercial market and we have to hope that rates will harden eventually, maybe next year.”
Brian thinks it will take longer still. He says: “It could be 2008 before there are substantial rises.
Football League vs Hammonds
The need for good professional indemnity cover – and the potential for insurers to face big losses – was brought home earlier this year when the Football League challenged law firm Edge Ellison over the collapse of a television deal.
The League was looking for £150 million in compensation after its contract with ITV Digital collapsed in 2002. It argued that Edge Ellison, now called Hammonds Solicitors, had been negligent and failed in its duty to protect the League’s interest when the original deal was negotiated in 2000.
However, the High Court ruled that the Football League knew about the risks it faced when it signed. The judge did agree there had been two minor breaches of duty – but awarded a token £4 in damages.
Hiscox’s Laura Day says: “Had the League won, it would have shaken up the legal PI market and maybe would have brought insurers to their senses.”
The new frontier
In today’s litigious world, PI cover is finding buyers beyond the traditional professions. And brokers can capitalise on these emerging opportunities.
Companies in fields as diverse as IT and advertising are finding new risks in the way they do business.
Gary Head, Underwriting Director at Hiscox Professions, says that businesses are now often gambling their future on ambitious computer systems or high-profile marketing campaigns, which can break a business if they flop.
He says: “When companies or their liquidators are looking for redress, an obvious place to start is the consultancy that crafted the IT system or the marketing campaign in the first place.”
Meanwhile, the internet brings new risks of its own to all types of business. It takes just a few keystrokes to pull together material from all over the world to help compile a newsletter, sales brochure or presentation, for example. It is equally easy to breach another person’s copyright while you are doing so.
Some online systems in the US are now scanning the web to search for unlicensed use of copyrighted images and data. Each use they detect can trigger a possible legal action.
These safeguards are only going to become more common, which is why good brokers will help clients to help protect themselves and drive growth for their business.