Sharing out the PI

It seems scarcely a few months since the solicitors' professional indemnity renewal season ended and yet here it is, almost upon us again. At last year's renewal, on 1 October 2005, competition meant the total premium spend fell by £7m to £234m. Premiums have moved within a relatively confined bracket for four years.

One factor in the 2005 renewal was the increase in minimum cover to £2m (£3m for incorporated practices), though the cost of that was more or less mitigated by the anticipation that new aggregation wording limited exposure.

Key players throughout have been St Paul Travelers, Zurich Professional and QBE, but of the original 34 qualifying insurers less than half remain. There are currently 10 qualifying insurers who were not involved at the start, while several others have come and gone.

At the 2005 renewal, Zurich Professional held pole position, with 22.6% of the market, but covering 30% of all firms. QBE moved up to second place with a 15.7% share and St Paul Travelers took 14.5%.

AIG Europe took a significant increase in number of firms covered with 8.8%, followed by Norwich Union (8.2%), Royal & SunAlliance (6.6%) and WR Berkley (5.3%).

Hiscox all but withdrew from the market with a reduction from 6.6% to 1.1%.

There were also new entrants to the primary market, such as Liberty, which had previously had only an involvement in the top-up market, albeit doing so for many top 100 firms.

Existing market
The mutual SIMIA became a qualifying insurer solely for the purpose of writing cover over £1m in order to keep its existing market.

Several firms changed insurers, many affected by exposure to The Accident Group (TAG) litigation and withdrawal of Hiscox, which impacted mainly high street firms. Recall that the TAG litigation involves claims by after-the-event insurers Winterthur and Lloyd's insurers claiming against over 600 law firms.

Legal Risk's annual Top 100 professional indemnity and risk management survey revealed that among the largest firms only 7.4% of respondents changed insurer, the sole reason being cost.

The fact that the market absorbed the effect of the TAG claims last time and accepted a reduction in overall premium, coupled with the number of players still around and market conditions generally, suggests it will probably not sustain any marked increase in premium this time.

Questions remain however. First, are the current rates sustainable in the long term? A report by Datamonitor indicated that Zurich had sustained losses on earlier years and it cannot be alone in that.

Second, the market is still heavily dependent on three major players. If any of those were to withdraw, there would be a large gap to fill which would not be filled at current rates. Even though claims have not increased significantly, and may even have fallen in some areas, it is questionable whether current premium levels are sustainable in the long term.

It has to be stressed that none of the top three insurers has declared any intention of withdrawing at all, but in the real world

decisions can be foisted on any business for wholly extraneous reasons, such as catastrophic losses in another market, or merger of insurers, which then decide to reduce their exposure in a particular market sector. Nor are these entirely hypothetical examples, as both history and press reports relate.

New players could fill part of any gap, but there would still almost certainly be pressure on market capacity.

The size of the premium is an attraction to insurers, but though the Datamonitor report UK Commercial Liability Insurance 2005 shows that money can be made in the London professional indemnity market across the spectrum of professions, insuring legal professions worldwide has often failed to deliver a profit, and many jurisdictions have had to adopt mutuals or hybrids to fill the gap.

Pressure on market capacity in turn might cause firms to look more seriously at their risk management than many have to date.

Managing risks
Certainly there are signs of change in this area - Legal Risk's Top 100 Survey identified a noticeable increase in large firms focus on managing risk with more appointing full time risk managers, limiting liability contractually, and converting to limited liability partnership status.

There are signs too of some smaller firms taking similar steps, but the profession still has a long way to go. New conduct rules, already passed by the Law Society, but awaiting approval through the statutory process which is anticipated in the autumn, will require all firms to have procedures for risk management including business continuity.

Some insurers are beginning to look more critically at law firms' risk management. Brokers' questionnaires have become ever longer.

How truthfully they are filled in may sometimes be questionable given the claims which follow shortly afterwards, and there are increasing signs of some insurers obtaining independent reports on the more difficult risks.

When will the renewal season start? There will always be a few early renewals, doubtless a handful already done, but analysis of the top 100 firms in Legal Risk's survey shows that over 80% of the action can be expected in the last three weeks prior to 1 October.

Last year, nearly a third renewed in the last week. That may of course be attributable to firms who had a quotation holding on in the hope of a better deal, but it is still clear that little action can be expected much before the deadline; under 12% renewed before September last year.

So, overall, my prediction is to expect a rush for the finishing line after the summer holidays, and only marginal increases on premiums. IT

' Frank Maher is a partner in Legal Risk, a firm of solicitors specialising in risk management for law firms and their insurers

He is author of Risk Management in the Legal Profession, and co-author of The Money Laundering Reporting Officer's Handbook: A Guide for Solicitors