Storm survival: How mid-sized law firms can reduce their PII premiums

Basic survival against mounting competition, compliance and risk management, the post-Legal Services Act environment and bleak economic conditions are all big threats to small to mid-sized UK law firms, which do not have the scale of larger firms to weather the storm.

Alongside that, there is continuing uncertainty in professional indemnity insurance (PII), which is one of the biggest costs for any law firm. It’s probably one of the top three expenses, yet many managing partners simply don’t know what their firms are spending on PII. Not many can calculate it to the nearest £10,000 and some have no idea at all, having devolved responsibility to the ‘insurance partner’.

But, if you don’t know what PII is costing your firm, how can you focus on getting a better deal and managing costs down? You don’t have to take the premium on the chin – you can manage down the costs through improved risk management and fewer claims.

Claims levels are still running too high in the sector, and that simply doesn’t give insurers confidence. Better risk management is vital. Firms can start by getting the right quality marks, but then they must make sure they stick to the set procedures. Firms need to be continually assessing risks and embedding a culture of risk management. It’s a virtuous circle, where if you manage risk and get claims down, you will see insurance costs reduce.

Greater management of risk in firms is being driven by the Solicitors Regulation Authority (SRA). Compliance has become a big challenge, especially in smaller firms, which may not have the resources for effective implementation. Introducing Lexcel or ISO 9001 accreditation – or both – would be a good starter, but few firms are committed to either; no more than some ten per cent currently having Lexcel, for example.

The problem for smaller firms is that risk management has to be placed alongside all of the other changes that are hitting them at lightning speed. The recession forced many firms to take steps to control operating costs that they should have taken ten years ago, long before hard times hit, which would have placed them well to tackle the combined effects of recession and changes in the sector. The challenges they face include becoming leaner, working smarter, embracing technology, outsourcing processes that someone else can do cheaper and better, finding new markets, being passionate about client service and quality and differentiating themselves from the ‘crowd’.

Yes, it’s a daunting task for many smaller firms, but the choice is simple: either embrace change and become fitter, and control risks and become more competitive, or get out of the market altogether.

Market developments

There is however some good news in the insurance market, due in part to the forthcoming changes which should benefit firms by increasing competition.

The SRA is allowing flexible renewal dates after October 2013 and scrapping the assigned risks pool (ARP), much hated by insurers, from that month. Abolishing the ARP will help increase competition in the market because it will give new insurers more confidence that they won’t have to pay the awful penalties previously levied on them, which ran to many millions of pounds each year.

In any softening market, there will be a few insurers that will charge low premiums to attract business. However, it’s important to ensure you know the credentials of the insurer that you’re dealing with. There are several unrated insurers now operating in the market and this carries inherent risks for firms using them, because if their insurer goes out of business, then those law firms affected may have to obtain their insurance all over again.

Another major change to the way risks will be approached and assessed comes with the dramatic reshaping of the sector as a result of the increasing emergence of alternative business structures. Insurers have indicated that this is changing the way that they rate risks, the information they want, and the cover that they provide for different parts of a firm’s business, depending on who is regulating each part. Any firm that is multidisciplinary will cause an adjustment to underwriters’ thinking.

The market will likely remain competitive for good quality risks, but the ongoing fallout from the global financial crisis, UK recession and property market crash will continue to push fraud levels in everyday legal work areas such as property. Consequently, premium levels are not expected to drop significantly.

This is where risk management shows itself as such a crucially important factor in running a law firm today – the consequences of getting it wrong and ending up with a claim can have far-reaching and long-term effects on premiums. If you have had a bad claim, while it is vital to show that you have taken steps to rectify the issue that caused the claim in the first place, it’s unlikely to create an instant improvement to your premium, as the outstanding risk to insurers from the original breakdown will remain for some time.

Also, the type of work firms undertake can affect premium levels, as insurers’ appetites vary greatly for niche work, as well as for work that is considered a high risk for fraud and claims. Firms should also avoid the temptation to take on work outside of their areas of expertise, even if other work is falling, as ?they are immediately exposing themselves to a greater likelihood of claims arising.

This is all part of the balancing act for smaller firms. How can you keep costs down and run a lean business, while also dealing with the ever-increasing burden of compliance? To ignore the problem means that you are likely to find less favourable terms when it comes to insurance renewal, but if the whole compliance/risk management side of things looks too tough on your own, there are other options, such as joining a group scheme.

Group schemes

A group scheme provides something your firm can’t get on its own. You are buying a degree of stability in underwriting which comes from pooling lots of money with one insurer. You are also buying input from the insurer in quality standards and low brokerage fees. And you are getting it all at a very competitive price.

But, for a group scheme to achieve significant discounts in premiums, it is has to be about much more than bulk buying. The greatest benefit can be found where you are offering a volume of good-quality risk with similar profiles to the insurers.

One concern sometimes expressed about buying insurance as a group is that it could limit the options open to firms because of the size of the placing. Certainly, there are only a certain number of insurers that can provide the kind of benefits a group enjoys and which have a proven commitment to the legal market.

Another concern is that firms may suffer if one member of the group has a poor claims record. But, the fact is that each firm is rated on its own record – members do not subsidise each other. However, if one member does have a bad claims period, being part of the group can stop the insurer overreacting because it knows it is getting premiums from the group as a whole.

If your firm is considering membership of a large group, it needs to closely examine the benefits and the return on investment that’s on offer, as well as the longevity and stability of the group. Ask yourself which other firms are members and do they match yours in terms of quality, risk management attitude, culture and work types? If they don’t, any benefit of approaching the PII market together could be negated and you might be better off on your own.

Whether going it alone or together, what is most important is keeping PII at the forefront of your attention throughout the year. By ensuring your risk management and compliance culture is in order, you can start to challenge your premiums and reduce one of the highest costs of running a law firm today.

 

---

Managing your premium downwards

• Get up to speed – make sure you know everything you can about your PII profile, claims history and how much it costs and then you can work to manage your premium.

• Choose carefully – expertise and market leverage are important, so make sure you are with a reputable rated broker and insurer, or it could be an expensive choice.

• Give the full picture – provide as much information as possible when applying for PII. Insurers can now be selective and, with the better part of 10,000 firms renewing their PII on one day, if you’re presenting poor or incomplete information, you’re not going to get a favourable outcome.

• Don’t leave it too late – submitting your proposal form as early as possible will leave you and your broker with more time to negotiate the terms and answer any additional questions insurers may have. This is not something you should leave to the last minute.

• Demonstrate good management – highlight the excellent quality and risk management procedures in your firm, including any independent accreditations.

• Be disciplined – maintain good discipline in closing off old claims, update your records regularly and deal with any issues promptly.

---

 

John Thomas is chief executive of UK law firm network LawNet (www.lawnet.co.uk) and has led the development of its group PII scheme