Charles Hawtin reviews the SRA claims data findings and asks whether the data proves PII premiums are too high?
The Solicitors’ Regulation Authority (SRA) is looking at professional indemnity insurance (PII) reforms again and this time they are armed with data. For the first time, claims data from insurers over a ten year period has been collated and published. But does the data prove that PII premiums are too expensive and that a reduction in the compulsory minimum limit of indemnity will result in reduced insurance costs?
The SRA required all participating insurers who signed up on 01 October 2015 to provide claims data from 2004 to 2014. The headline figure from the report is that over this period PII claims from solicitors’ amount to a staggering GBP1.96bn1 against an estimated premium income of GBP2.35bn. On the face of it, this would indicate that insurers are indeed making a profit. However, the claims data has two flaws:
Firstly, it has been collected only by insurers who were participating insurers as at 01 October 2015, which means that the claims experience from the likes of Quinn, Elite and Balva were not included. If we included the premium income of those insurers who have withdrawn from the market over that ten year period, this equates to 18%. Therefore the claims figure would be to nearer to GBP2.3bn or on average GBP231m per annum.
Secondly, due to their nature, the value of PII claims develops over time. With the claims experience provided by insurers still developing over the period from 2010 onwards, this means that the ultimate incurred position is likely to be underestimated. If the figure was adjusted to take into account adverse development, this would add a further GBP43m per annum, meaning that on an annual basis solicitors' claims cost, on average, in excess of GBP273.5m.
In addition to this, insurers need to account for costs and expenses and an element of profit. Taking all of the above into account, we estimate that the amount of premium income insurers would require to achieve a level of profitability would be closer to GBP369.5m. Therefore, whilst the SRA may have hoped that the claims data would support the notion that PII reforms would lead to reduction in premiums, the data shows that insurers would potentially need to increase premiums by around 21% to break even, or 35% to achieve a profitable return.
What does this mean for the market?
If we look at the solicitors' PII market as a whole, of the 28 insurers in the first year of the open market, only six have consistently written solicitors' PII at every renewal since. Our own research shows us that, since 2000, the average period that an insurer has written solicitors' PII for is just six years. Focussing specifically on the 1-4 partner space, the position is even starker, with insurers providing terms for just four years before withdrawing. Looking at the claims data, it is no surprise that this should be the case. Our considered view is that the current market conditions are unsustainable in the short term and we will see a contraction in the level of competition.
What should solicitors do?
Whilst for many renewal may seem a long way ahead, we recommend you look carefully at your insurer and your broker. At this stage our advice would be not to risk relying on a non-specialist or “sales driven” broker who offers you price and price alone, no matter what they may have achieved for you in the past. The fast approaching reality is you will really need a specialist with the direct insurer relationships, expertise and know-how to help you navigate what will inevitably be more challenging conditions than experienced over the past couple of years.
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1 Source: p.11 Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historic claims data, Crispin Passmore, Executive Director, Policy, Solicitors Regulation Authority.
2 Source: participating insurers NPW returns 2004 to 2013