Daily briefing: Monday -Turbulence at home and away

As the 1 October deadline for solicitors’ professional indemnity insurance draws near, Chartis announced today that it will stop writing new business in the sector.

Chartis had the largest market share in 2010, at 18%, writing around £38.5m of business.

However, will Chartis’s exit really shake the market up that much?

Capacity counts

First, Chartis is likely to retain a healthy proportion of its current book, especially now that it can focus on renewals rather than battling for new business.

This is the time of year that worries and rumours about capacity do the rounds, but the solicitors’ PI market is shaping up to have no capacity problems for this renewal.

Previous capacity worries have generally been centred around a lack of cover for smaller law firms or firms that focus mainly on conveyancing work.

The Quinn factor

This was certainly the case when Quinn confirmed it would not underwrite solicitors’ PI last August for the 2010 renewal. The Irish insurer specialised in smaller law firms, which then had to find alternative cover in a market that generally preferred to underwrite the larger firms, which were seen as lower risk.

Even then, with insurers and brokers bracing for a difficult renewal, the result was almost exactly the same as the year before.

In the end, only 409 law firms applied for the assigned risks pool in 2010, slightly down from 411 in 2009.

New entrants

This year, the market will be helped by the entrance of First Title, which announced last month that it was joining the market to specialise in smaller law firms that handle a lot of conveyancing.

There are also plenty of other insurers with an appetite for all types of law firms, and there are rumours of yet more new entrants.

So while Chartis’s decision to stop underwriting new solicitors’ PI business may have raised a few eyebrows, it is unlikely that the market will be greatly affected by the time 1 October comes round.

Insurers at risk from sovereign woes

The US downgrade last week is worrying for UK and global insurers.

Many of them hold US government bonds on their books, attracted by the stability of the investment and the regulatory requirement to hold quality capital.

If the downgrade causes these bonds to substantially lose value, insurers would be hit in the pocket and would have to declare this as a loss on their balance sheets.

The chances are that it won’t happen, because US treasuries are still highly in demand. Where else do investors turn? Japan and European countries, barring Germany, are hardly in the best fiscal health.

S&P warning

Nevertheless, rating agency Standard & Poor's warns that the USA could face further downgrades if it fails to trim its current account deficit.

Were that to happen, it could really be catastrophic, and here is the reason.

Even with the current downgrade, treasuries are rated AA+, still considered a suitable rating for high-quality investment grade.

Further downgrades could send the rating below the high-quality investment grade required under regulatory rules.

That would spark a mad scramble as insurers, along with banks and pensions funds, have to find quality capital elsewhere.

That would also hammer the bond prices of treasuries, feeding through into hits on the profit and loss account or the IFRS equity.

Italy alert

Bond price movements are also a problem for eurozone insurers, such as Generali, AXA, Ageas and Allianz, which hold large quantities of Italian sovereign debt.

Insurers, pension funds and banks would suffer extreme problems far before a default by Italy.

It’s sad to say that insurers, which did so well to avoid the recklessness of the banks, could now be dragged into the maelstrom.

Such a possibility is small but is nonetheless growing with every week thanks to the incompetence of politicians around the world continues.

As a catastrophe insurer will tell you, if the hurricane is strong enough, even the strongest house will get swept away.