With PI insurers predicting a flood of claims for 2009, premium rates went up in the renewal season of 2008 for the first time in years. Nick Pointon surveys a much-changed market for solicitors' cover

The 2008 professional indemnity insurance (PII) renewal season came as a surprise for many legal firms. It was the first year for some time that premium rates went up. PII protects the insured and its clients against the cost of defending claims or paying damages if errors or omissions are made by the practice. Despite forecasts in previous years that cover would become more expensive, competition had continued to push rates down to unprofitable levels and solicitors became accustomed to paying ever-decreasing prices.

The annual discounting for solicitors' PII premiums could only continue for so long. In 2008, the combination of mounting pressure from the commercial and residential property markets – with PI insurers predicting a flood of claims for 2009 – along with insurers' reduced investment income, prompted an end to the soft market. As a result, premiums went up in 2008 and early signs are that these hikes will continue into the 2009 renewal season, with policy terms and conditions becoming more restrictive at the same time.

Firms hit hardest by the rise in premiums rises are those that have experienced the largest number and size of claims. In 2007-08, the amount paid out by insurers in claims outweighed the premium income earned, resulting in a multi-million pound deficit which insurers have had to recoup. For every £1 of premium earned, insurers were paying out around £1.60 in claims, according to one statistic.

Looking at the performance of the PII market, insurers have experienced the bulk of their losses as a result of providing such cover to the legal sector. Claims have tended to outweigh premiums for a number of years, and whereas previously insurers could rely on their investment income to cover the deficit, returns in the last 18 months have suffered as a consequence of the economic downturn.

Some have elected to withdraw from the solicitors' PII sector altogether, which has contributed further to the hardening market. The amount of insurers willing to 'compete' for business for firms with fewer than 10 partners has almost halved in the last few years. Many firms with fewer than four partners will be left with perhaps two to three insurers willing to offer terms, whereas two years ago they may have expected five or six different quotes each renewal.

Qualifying insurers that have remained in the market are looking to minimise their exposure to claims by seeking a less risky book of business. They are instructing their brokers to present them with only the best-quality firms. If their own actuaries and management are putting a limit on how much solicitors business they put on their books, they want to ensure that what is on there are the firms that they have chosen, rather than the firms that are high risk but maybe attract a large premium. The question many underwriters will be asking themselves will have changed from 'what price shall I offer for this risk?' to 'shall I offer terms at all?'.
The natural step for firms to take is to ask what their broker can do to help. Brokers are being called upon to improve their insureds' risk management processes. Whereas a couple of years ago, merely placing the insurance sufficed, the solicitors' PII broker of 2009 needs to demonstrate that they do more.

Choosing your broker

With expectations of further turmoil emanating from the financial markets and increasing premium rates in the PII market going forward, it is more important than ever to apply stringent selection criteria when choosing a PII broker. Central to this process is establishing which brokers are best placed to obtain the most competitive quotes and which are able to add the most value to their insured's risk management strategy.

Any selection process should include the following considerations:

Claims handling: Does your broker have an in-house, experienced claims management department in whose hands you would feel safe in the event of a claim? The advantage of your broker having a claims department (and not all of them do as a number opt to outsource this service) is that you will receive assistance and advice on how to proceed if and when any circumstances do arise. It is also important to have a claims technician to act to protect your interests and not those of the insurer (particularly where you are dealing with the insurer on a direct basis without the assistance of a broker).

Independence and market position: Your broker should have access to several insurers so that a full market survey can be conducted on your behalf. There is less chance of getting competitive terms from brokers that are linked to just one insurer. Some schemes are closed to certain brokers and you may have to approach a different broker to the one you are currently using in order to access them. You might want to check whether the broker is a Lloyd's broker so that the specialist Lloyd's insurance market can be accessed. This is of particular importance for firms requiring more than the minimum level of cover, or those that have a risk profile that differs from the norm.

Experience: Is your broker a relatively new firm dealing with other classes of insurance, or is it well established with specialist knowledge of the PI insurance sector and the solicitors market in particular? Brokers with more specialist knowledge of the PII sector have a greater ability to deal with renewals effectively in volatile insurance markets.

Approach: Does your broker ask you to complete a "sole letter of appointment" from the beginning? This should not be necessary for firms dealing with a small number of well-chosen brokers and it could potentially limit the number of options available. If a broker's first act is to insist on one of these it may be a sign that they do not feel secure with their panel of insurers and are not confident they could withstand the competition from a full market exercise. Check before signing any of these agreements. Be aware that by doing so you are making a commitment to work with one broker only. It is, however, commonplace for larger firms to work with their broker on this exclusive basis.

Risk management: Is your broker experienced in the provision of risk management services? For example, do they actively arrange risk management events to pass on knowledge and training, or have they negotiated other provisions such as joint initiatives with Lexcel, the Law Society's practice management standard, or other quality marks? Do they have additional insurance products to cater for the range of requirements that a firm may have, such as defective title insurance? It is in your broker's best interest (which ultimately means in your best interest) to have a book of business with a better risk profile.

Reviewing your risk profile

The most effective way of limiting the impact of premium hikes is by reviewing your risk management strategy, finding the gaps and taking necessary steps to reduce risk exposure and, as a result, exposure to potential claims. There are a number of key measures that should be considered when shoring up your risk profile. These include:

• Be aware of important dates and conduct strict periodic checks to ensure compliance;
• Conduct regular random peer file audits, including partner-to-partner file audits;
• Create a training plan to ensure all fee-earners keep up-to-date on changes to the law;
• Follow formal file closure procedures with checks to ensure compliance;
• Use robust procedures to ensure the hallmarks of mortgage fraud are identified and reported to lender clients;
• Follow new client intake procedures to identify money-laundering and potential conflicts of interest; and
• When submitting your proposal form for this year's PII renewal, be sure to identify your risk management credentials and make them clear to insurers.

Many of these points may sound obvious, but experience shows they can make a big difference to claims and hence to future premiums.

As another PII renewal season approaches, with every expectation that prices will continue to rise, it is essential that firms take the time to review their risk management procedures and broker selection processes. Taking the necessary steps before it is too late will help limit the impact of the difficult market conditions and continue to pay dividends in the long run.

Nick Pointon is managing director at PYV Legal.