Christine Hyatali of Reynolds Colman Bradley LLP, a specialist dispute resolution law firm for insurance, Read More
When renewing your Professional Indemnity insurance (PI) it is important to understand what influences an underwriters’ approach when pricing a risk. Having a greater understanding of the process of underwriting can help your practice achieve the best possible outcome in terms of pricing.
What the underwriter looks for in a proposal form.
1) The proposal form – as basic as it might seem, if an underwriter is shown a properly completed proposal form the firm is instantly regarded in a more positive light.
It may seem trivial and it might feel like a misallocation of time but this can genuinely have a material effect on the premium charged by an underwriter. More often than it might be realised, these forms are completed in a hurried manner, by hand, at the end of a day. A zero becomes a nine and 4.5% becomes 45%. With 70% of law firms still renewing their PI on 1 October underwriters are short of time during this busy period of the year. Having to review the same proposal form a number of times will agitate the insurer, slow down the process and lead to frustration for the law firm.
2) Claims – despite a belief that they shouldn’t, claims do occur. If they didn’t the Solicitors Regulation Authority (SRA) would not mandate a firm have cover in place in order to practice.
That said, continued claims from the same department will be hard to explain. However, underwriters understand that even the most careful firms will have claims and notifications. This is a fact of professional life. If a firm takes the time to explain why a claim arose and what actions it has taken to protect against this happening again it can influence the underwriter in a positive way. Often a firm that has gone through a challenging experience, and developed its risk management as a consequence, is a better risk for the future. Take the time to give a full and complete explanation – again, go beyond the circumstances and educate the underwriter on how the firm has improved as a result.
3) Areas of practice – certain work types remain high risk from an underwriting perspective. It will come as no surprise that in an economic downturn firms with a high level of conveyancing face more claims and, as a result, increased premiums.
A firm must help an underwriter understand their work split past the percentages on the proposal form. Where a firm has a high work percentage in an area that is viewed as high risk they will benefit from taking the time to explain how they mitigate, control and avoid these increased risks. Showing that this is a potential, rather than a certain, risk will reassure the underwriters about the quality and approach of a firm to its risk management.
4) Risk management – The SRA continue to put law firms under the microscope; this has resulted in a good approach to risk management becoming an increasingly important part of how underwriters view a firm. However, in some cases firms have failed to understand the true value of this. Risk management cannot be a ‘tick box’ exercise. It is something that must be embedded in a firm’s culture from the top down. It is increasingly rare for an ‘A’ rated insurer to offer terms without the completion of a Risk Management Questionnaire (RMQ). These can be lengthy. However, this does not mean it is redundant.
A RMQ should be viewed as an opportunity to delve into the detail of the firm. A firm that takes this approach and gives the questionnaire the time it requires will often see the benefits. There are a number of instances were firms have identified potential issues and addressed them before they become large claims. Benchmarking against an RMQ can help a firm in numerous different areas as well as reduce their insurance premium.
5) Disclosure of material information – The Insurance Act 2015, which came into force in August 2016, deals with insurance contract law in relation to business insureds (law firms) and clarifies the extent of the duty of disclosure. It introduced the concept of ‘fair representation’.
Remaining open and honest with your broker and insurer is vital. Insurers aspire to create long-term relationships with their clients – for example a change in partner numbers, is material, but does not automatically mean an increase in premium or the requirement to move insurers. It is important that you are open with changes in your firm. Helping the underwriter understand what the firm is doing, how it is changing, and what this will mean for the future, will rarely have negative consequences.
Issues in the market
The openness and prevailing Minimum Terms and Conditions of the Solicitors Regulation Authority (SRA) wording have continued to see law firms exposed to a potentially high level of claims. It is therefore crucial that law firms, regardless of size, adopt a professional and engaged approach to their risk management and Professional Indemnity (PI) insurance. Approaching your renewal as an afterthought, ‘late in the day’, could have serious consequences for your firm.
Our specialist PI team have over 50 years’ experience in advising and placing law firms’ insurance. Some of the main issues we have seen are:
- Law firms purchasing cover unfit for purpose. This can come about as a result of being underinsured; obtaining the minimum level of indemnity set by the SRA to save costs; or having too high an excess to try and bring down the premium.
- Placing your insurance with an underwriter not suited to your firm’s risk profile. Each insurer will view and rate a firm differently. These variations in price and cover are dictated by a number of factors – it may be how an insurer views a particular work type; or what they believe to be a satisfactory manager to staff ratio.
- Choosing an insurer solely on price. A cheap premium can be a warning sign – selecting the right insurer, in terms of their commitment and understanding of the PI market, is vital. Under English law, while under a duty to exercise reasonable skill and care in the selection of an insurer, an insurance broker does not guarantee the performance of the markets they place their client’s business with.
Looking at the problem further
- Purchasing the right cover. If a law firm is poorly advised they will not understand their true exposure, and in turn, the ramifications of underinsurance. By purchasing the minimum limit of indemnity, say £2m for a partnership, in order to save money, the partners could find themselves personally liable. A claim of £2.1m would leave the partners responsible for £100,000. Sadly examples such as this are more common than people realise and can result in a well-run law firm going into run-off in a dramatically short period of time.
- Understanding the wider market. Over the last 12 months the PI market has undergone some substantial changes. A number of ‘established’ insurers have left the excess layer market leaving firms looking for cover at short notice and exposed to increased rates. The same is true for the primary layer markets, with insurers reducing their capacity and moving capital to other, more predictable and profitable classes of business.
- Placing your risk with the right insurer. Having a relationship with a specialist PI underwriter is crucial. The latent nature of PI claims requires underwriters to truly understand the risks they are accepting. While this might mean paying a slightly higher premium it can also mean a greater level of consistency. The underwriters who understand this market will remain here – too often in recent years insurers have entered this market space lacking the required knowledge to be successful. They quickly suffered significant financial losses as a result of quoting cheap premiums and left again.
Addressing market issues
Having the right insurance broker advising allows a law firm to control and sidestep the issues they are exposed to.
- Our UK Professions team has a wealth of experience in creating bespoke insurance solutions for law firms. We use our in-depth knowledge and pool of data to benchmark and compare firms, ensuring they have the right level of indemnity and the correct excess to suit their risk exposure. We understand that no two law firms are the same and to assume they require matching insurance programmes would be short sighted. We take the time to understand our client’s business and make sure they have the right protection in place.
- As an independent broker we are not tied to any one market. We have close relationships with all the insurers we work with. We understand which markets will offer preferential rates to which risks, allowing us to place each client with the most appropriate insurer. We also benefit from two market exclusives, LawSelect and AIG, which no other broker can receive terms from.
- All the insurers we place risk with are ‘A’ rated – this financial security supports reliable rates from underwriters who understand and specialise in the PI market. Our regular interaction with the insurers allows us to understand and pre-empt any changes likely to affect our clients and the wider market. This enables a more consistent and stable experience for our clients.