Doing the level best

Solicitors' professional indemnity cover has not provided the profits some insurers anticipated. In this notoriously long-tail sector, claims are invariably springing up several years down the line and hitting insurers hard. Whether it is a slightly injured individual who has tripped or slipped and claims they were misadvised, or a major commercial client arguing that a valuable contract is lacking, every insurer knows that some solicitors' PI claims are inevitable.

Insurers must invest in claims teams and having skilled lawyers is also imperative to providing insured clients with the best-quality service possible. Insurers also need to do their level best to ensure claims do not arise in the first place and be committed to making PI premiums consistent.

Further rate rises are necessary, although the better risks, specifically those that have worked with the firm over the long term, should merit a discount.

It is of concern, however, that some newer entrants are now reducing premiums - the sort of short-term logic that history has shown needlessly unsettles the market. It is likely that some of the providers may later re-examine their pricing strategy, which could lead to market instability.

And, following the demise of the Solicitors' Indemnity Fund in 2000, this is the last thing the market needs.

There are now signs that we are entering a softer market but this is not necessarily good news for insureds. No one needs reminding that SIF came to an end because it was unable to continue as a viable risk-transfer mechanism. Those on the Law Society's approved panel now need to demonstrate that they can make this a stable sector and provide their insureds with consistency, high levels of service and a sensible rating environment.

Profitability can only come through really knowing your market. There are many legal disciplines and types of firms and they all have differing claims histories and ways in which the partnerships operate. It as important to meet as many insureds face-to-face as possible and to find out as much as possible from brokers about the risks.

Insurers need to be fully aware of a law firm's particular areas of specialisation and where the potential risks lie. It is about getting to know the individuals in a practice, how the firm operates and understanding the issues they face.

Many insurers will have different preferences. Hiscox has focused on the specialist areas, and has been approved as a recommended insurer by the Criminal Law Solicitors' Association and the Sole Practitioners Group.

Hiscox's target firm is well summarised in its underwriting philosophy - to insure the professional's professional. Low-risk firms in particular have been targeted, however, even firms in this category have large losses and rating adequacy remains essential. Getting to know your target market and building up relationships with the client takes time. Hiscox's core target market is the SME sector and it has an exclusive arrangement with broker Alexander Forbes for firms of one to five partners. For the sector of greater than six partners, Hiscox works with a number of brokers and will be looking to expand its broker panel.

Higher-risk areas

At the other end of the spectrum are the higher-risk areas, which include commercial conveyancing, trust and probate, commercial law and lawyers specialising in class-action work.

The work of the broker is essential - it is invaluable for the underwriter and the client. Increasingly, it is about insurers and brokers working in partnership. It is crucial that insurers are active in cultivating these essential partnerships with brokers. Once a relationship has been established between Hiscox and a broker partner, a member can be rewarded with preferential rates and Hiscox constantly looks at ways in which it can add value - recently this has taken the form of participation in the CLSA's conference.

As holders of indemnity insurance themselves, brokers know the importance of understanding the cover and the market inside-out. The complexity of PI means this is a tight broking market. The market is dominated by the nationals that offer specialised expertise, however, some regional brokers are looking to grow their accounts with their local relationships.

Currently, brokers and insurers find themselves in a commercial market place - SIF took on everyone and most insurers are now more discerning.

But, no matter how good a law firm's legal prowess may be, not all of them put enough effort into placing their insurance cover as insurers would like them to.

This year, solicitors had a slightly longer lead-in to prepare for their renewals, with the date moving from 1 September to 1 October. Statutory changes to the renewal deadline, however, have not had a major impact on the market. The change was made to make life a little easier for lawyers, since so many are away during August, but most insurers will agree that there has still been the usual last-minute scramble, with proposal forms arriving right up to the 11th hour.

It will be an ongoing task for brokers and insurers to try to promote the benefits of early renewal. Hiscox sent out its renewals in May and offered those who accepted the terms a discounted rate. There were, however, plenty of lawyers who did not see organising their cover early as a priority.

As far as rates are concerned, premiums ought to rise at a moderate rate in most cases, as claims inflation (the cost of handling solicitors' claims) is calculated at 7%.

There is now some competition for the better risks and some of these firms are obtaining cheaper cover than last year. And there now exists real potential for success - both for insurers and insureds as firms invest in risk management and reap the rewards of cheaper premiums.

In a just few years, the importance of risk management has become much more widely accepted. Now lawyers themselves are offering advice and brokers, along with other experts, are setting up consultancies on a fee basis.

The Law Society's practice management quality mark was launched in 1997 and requires firms to undergo independent assessment based on the working procedures. There is greater awareness of key factors such as the standardisation and ease of use of computer systems, especially diary systems, workflow processes, internal communication and reporting lines, partner/assistant ratios and the degree of risk management training undertaken by staff.

Hiscox is a strong supporter of Lexcel, although it has found that, while this can mean marked improvements, it can take a couple of years for a firm to really begin to see the benefits and this is when discounts may be offered. But no matter how well a firm is run, some claims are unavoidable.

Aggregation

A current hot topic is aggregation. This is where claims relate to a common cause - most policies have a 'series' or aggregation cause where two or more can be likened by a unifying factor. In some cases, the aggregation may favour the insurer. In solicitors' PI insurance, the indemnity limit for any one claim must, under the minimum terms, be at least £1m.

The current aggregation clause in the Minimum Terms (the Law Society policy wording) was shown to be insufficient after the Lloyd's versus Lloyds TSB ruling and the qualifying insurers are negotiating a revised wording with the Law Society. Until this is resolved, insurers have no sideways protection to the eventuality of a multitude of claims that cannot be aggregated in the primary £1m. This is simply not in anyone's interest and the only option is to reinstate an effective clause for next season.

The trend for some insurers to offer firms no deductible at all in a bid to win business is also a concern. However, the role of the excess as a risk management tool is fundamental and can save clients from excessive premiums.

It is also the role of brokers to explain the type of claims service the client is buying. A badly handled claim can cause major damage to a firm, both in monetary terms - resulting in increased premiums - and loss of reputation. A quality claims service will involve expert lawyers employed in-house. However, if a broker is to be an advocate for the claims service the client will receive, they should be assured that the insurer has the requisite expertise in the first instance.

Those firms that end up with a poor claims history may be unable to avoid the assigned-risks pool. And, while this may mean high premiums for the firms concerned, this is also a burden for the approved insurers that support it. Longer term, insurers ought to do more to raise awareness of the costs involved and encourage greater use of risk management.

Looking to the future, it is encouraging that there is a greater uptake of risk management markets. The standards of submissions are improving and the profession is benefiting from a choice of carriers. Providing rates do not plunge, this market should be able to turn in reasonable profits and provide its insureds with the service levels they deserve.

PI cover is generally the third-highest cost for a law firm - it is insurance that is compulsory and can mean the difference between staying in business and ceasing trading. It needs to be taken seriously and now is the time for the open market to prove itself.

AGGREGATION

- The current aggregation clause in the Minimum Terms part of the contract states "the same act or omission or from one series of related acts or omissions will be regarded as one claim".

- The position changed as a result of the House of Lords decision in the case of Lloyds TSB General Insurance Holdings versus Lloyd's Bank Group Insurance Company Limited.

In this case, the wording was very similar to that in the Minimum Terms and the Law Lords ruled that the claims could not be aggregated.

- The qualifying insurers have suggested that a new clause is added to the Minimum Terms for 2005, which would allow insurers to aggregate claims. Until this is resolved, insurers will face another year without comprehensive protection and the possibility of sideways exposure to a multitude of claims.

- Under most professional indemnity policies there is a series clause, which allows aggregation. The Law Society wording, therefore, makes the solicitors' market unique.

- The Law Society is currently reviewing the position and there is commitment to a change by the next solicitors' renewal.