Today’s Conveyancer ConferenceSolicitors: The PI Insurance History, the SRA role and the likely future

September 2011 Steve Ray

Contents

• Solicitors practices in the Insurance market– Since the demise of the mutual– Background to the current position– Insurers concerns

• Key issues:– Wording – Common renewal date– Assigned risks pool

• The proposal form and maximising your opportunity in front of insurers

The Market and Insurers

• Solicitors enjoy the widest policy wording of any of the professions

• We will look at total annual premium paid and the additional factors

• Last four years have been unprofitable for Insurers which means that market for firms has polarised

• Also:– Ongoing worry about ‘W’ shaped recession!– Ongoing concerns over the credit risk of clients

What are Insurers saying - challenge and uncertainty

Reducing investment

returns

Expense costs

Reinsurance costs

Large loss frequency

Prior Year deterioration

Credit crunch

Increasing volatility

Natural

catastrophes

Insurers

PI Premiums

226246

215

£155m£161m

£221m

£251m£242m£235m

£211m£206m

0

50

100

150

200

250

300

Primary premium (£m)

20002001200220032004200520062007200820092010

True figure at 1st October 2010?

• A whole new dictionary of Insurance terminology:– Flipping – In-fill– Stretched primaries (i.e. significantly more than £2m or

£3m for LLPs)• Effect:

– Recent report for ARP Managers considers that true primary premium position should be at least £50m more

2000 Original Qualifying Insurers

CGNU

RSA

QBE

Zurich

Ace

Hiscox Syndicates

St. Paul

Hiscox

AIG

Chubb

R J Wallace

M J Harrington

Liberty

Brit

The Underwriter

R E Brown

Cox

Chartwell

Hicks & Wheeler

SJB (1212)

Denham

Axa

R J Kiln

Wellington

Drysdales

Heritage

P G Butler

Independent

Saturn

Admiral

Alleghany

Mitsui

St. Paul Syndicates

Janson Green

2000 Participating Qualifying Insurers

CGNU

RSA

QBE

Zurich

Ace

Hiscox Syndicates

St. Paul

Hiscox

AIG

Chubb

R J Wallace

M J Harrington

Liberty

Brit

The Underwriter

R E Brown

Cox

Chartwell

Hicks & Wheeler

SJB (1212)

Denham

Axa

R J Kiln

Wellington

Drysdales

Heritage

P G Butler

Independent

Saturn

Admiral

Alleghany

Mitsui

St. Paul Syndicates

Janson Green

2010 Participating Qualifying Insurers

Aviva (NU)

RSA

QBE

Zurich

Ace

Hiscox Syndicates

Travelers

Hiscox

Chartis (AIG)

Chubb

D A Constable

M J Harrington

Liberty

Brit

The Underwriter

R E Brown

Cox

Chartwell

Hicks & Wheeler

SJB (1212)

Denham

Axa

R J Kiln

Wellington

Drysdales

Heritage

P G Butler

Independent

Saturn

Admiral

Alleghany

Mitsui

St. Paul Syndicates

Janson Green

Newline

Alpha Ins

Novae

W R Berkeley

A G Dore

Catlin

Dual

Hannover

Quanta

Quinn

Aspen

XL Insurance

Allianz

Lemma Europe

2010 Participating Qualifying Insurers (over 5%)

Aviva (NU)

RSA

QBE

Zurich

Ace

Hiscox Syndicates

Travelers

Hiscox

Chartis (AIG)

Chubb

D A Constable

M J Harrington

Liberty

Brit

The Underwriter

R E Brown

Cox

Chartwell

Hicks & Wheeler

SJB (1212)

Denham

Axa

R J Kiln

Wellington

Drysdales

Heritage

P G Butler

Independent

Saturn

Admiral

Alleghany

Mitsui

St. Paul Syndicates

Janson Green

Newline

Novae

W R Berkeley

A G Dore

Catlin

Dual

Hannover

Quanta

Quinn

Aspen

XL Insurance

Allianz

Lemma Europe

The Market and Insurers(at 2010 renewal)

2010/11 Participation

2009/10 Participation

Rank Insurer Percentage Value (£) Percentage Value (£)

1 Chartis Insurance (UK) Ltd (formerly AIG) 18.06% 38.56m 14.91 36.02m

2International Insurance Company of Hannover 14.41% 30.78m 4.48 10.82m

3 XL Insurance Ltd 13.33% 28.47m 7.12 17.19m

4 Zurich Professional Limited 12.90% 27.5m 12.77 30.83m

5 Travelers Insurance Co Ltd 11.04% 23.50m 13.37 32.27m

6 QBE International Insurance Limited 8.22% 17.55m 9.97 24.08m

7 Allianz Global Corporate & Specialty AG 6.41% 13.2m 4.54 10.96m

8Aviva Insurance Limited (prev Norwich Union) 4.24% 9.056m 3.94 9.52m

9 Lemma Europe Ins Co Ltd 2.93% 6.14m 1.04 2.50m

10 Royal & SunAlliance Insurance PLC 2.24% 4.78m 5.87 14.17m

The Quinn Effect

• Entered market in 2006 (less than 0.4%) • Increased to 5% share in 2007, 10% in 2008 and

2009• 2,911 firms insured at peak. Mostly sole

practitioners and 2/3 partner firms• In administration (but importantly not liquidation

as per Independent Insurance)

Before 2010 renewal

• Withdrawals at 2010 renewal– Hiscox Insurance– Catlin Syndicate– Others threatened

• Following the CRA review and subsequent Consultation process, and the lack of activity:– A number of significant players were looking to enter the

primary market– Aspen Insurance, ACE and Pembroke Syndicate have exited– First Title have entered

Charles Rivers Associates & the Consultation period

What were Insurers asking for?• Cancellation for non payment of premium• Review of minimum terms and conditions

– Lender claims?• Assigned Risks Pool

– Not a hospice, what chance of rehabilitation?– Commercial reality

• Review of necessity for common renewal date

Policy wording

• Broadest coverage; if had wanted to impact on affordability then a number of opportunities were likely to be considered.

Assigned Risk Pool

• Premium equates to 27.5% of first £500k fees (30% for LLPs)

• Reduces in bands thereafter• Every firm qualifies• Inspected and monitored at the firm’s

expense• But how much is actually collected?• & non payment didn’t preclude firms

from continuing to trade!

The ARP – how bad is it?

Firms Total Incurred Premium Due Premium Paid

2000 69 £9,621,243 £1,490,277 £952,337

2001 136 £2,962,348 £1,883,347 £1,386,179

2002 60 £3,767,611 £1,657,439 £1,143,735

2003 59 £1,934,359 £1,175,192 £647,107

2004 38 £723,146 £634,225 £441,109

2005 33 £4,521,767 £927,297 £411,419

2006 32 £4,459,971 £522,552 £271,293

2007 28 £7,921,338 £308,308 £200,650

2008 168 £48,141,516 £4,788,562 £2,064,066

2009 274 £25,144,970 £6,053,553 £2,972,371

2010 295 £922,855 £12,921,899 £2,435,462

TOTAL £110,121,124 £32,362,651 £12,925,728

Assigned Risks Pool

• 1 October 2008 – worst year on record; only 43% of premiums due were collected

• Loss ratio (on incurred position) at end of July 2011, nearly 2000%

• Insurers have to fund the shortfall and therefore have to include within their rating

• 2009 year not fully developed but heading the same way and again premium collection falls short of expected

• Cash call April 2011 – for £38m, to fund some of the current shortfall (including £17.5m for 2008 year and £15m for 2009)

Assigned Risk PoolThe future

• At 2011 renewal – period which an individual firm can remain the Pool is reduced to 6 moths

• At 2012 renewal – costs shared between Insurers and profession (50/50 – how will the profession fund?)

• At 2013 renewal – disbanded, last Insurer gives notice and becomes Insurer of run-off policy (without premium consideration)– Effect on next 2 renewals – Further focus on financial position of firms

Common Renewal Date

• Most Insurers support moving to staggered renewal dates as do the Law Society

• Apparently the SRA consider this would be difficult • Smaller firms more opportunity to engage with Insurers /

counter argument is that so much premium on one day focuses Insurers attention and keeps premium rates down

• Common renewal date will now stay until October 2013

Run off cover

• All firms ceasing to trade should buy run-off cover

• Insurers have different payment criteria from 250% to 400% of annual premium (6 year policy)

• If acquiring another practice check on PII history

• Successor practice rules (changed in 2010)

Where Are The Claims Coming From?Historically

Claims by number

7%

18%

36%

15%

8%

6%4%

6%Personal Injury

Commercial

Property

Litigation

Trust & Probate

FinancialServicesEmployment

Non Lit Other

Where Are The Claims Coming From?2009 / 2010 – per loss type

Where Are The Claims Coming From?

Claims by value

11%

34%

24%

10%

5%1%

5%

10%Personal Injury

Commercial

Property

Litigation

Trust & Probate

Fin Services

Employment

Non Lit Other

Where Are The Claims Coming From?2009 / 2010 – claims incurred

Risk Assessment

From an Insurers perspective• 10,400 firms renew on the same day (smaller firms may

struggle to differentiate)• Size of firm (easy for Insurers to segment by number of

partners)• Number of offices (spans of control and supervision)• Work split• Claims history• Risk management questions / cross reference to Lexcel

or ISO 9001

Lessons to be learned

• Be careful with your Proposal Form in the market • Quality of submission

– Take the trouble to fill this in properly, ensure all questions are answered and all relevant information attached

– If you cant answer yes but you have information to explain this, take the trouble to do so

– Remember after salaries and perhaps premises this could be your largest expense

• Number of offices / number of partners• New partners, part-time partners• Quality systems• ‘Dabblers’

Learning from past mistakes and PII claims records

• Central point of contact• How many complaints claims? Trends emerging?• Underlying causes investigated• Explain to Insurers

Influence Insurers opinions!

• Why do Insurers place so much emphasis on Lexcel?• What to do if you don’t have Lexcel or ISO 9001?• CQS• Practical Law / Lexis Nexis• Differentiate your firm from the Insurance

Underwriter’s typical view of your size of practice• Buying groups?

The future

• SRA regulatory reach

• ABS

• Rebranding

Today’s Conveyancer ConferenceSolicitors: The PI Insurance History, the SRA fantasy and the likely reality

September 2011 Steve Ray