The Rise and Rise of Professional Indemnity Insurance

Ahead of the next round of Professional Indemnity Insurance (PII) renewals this month, it appears buyers, particularly those who found 2021 challenging, will find little consolation in 2022. But what are the drivers behind market caution?

The industry has maintained its cautious approach to COVID-19 and believes the pandemic may alter buyers’ risk profiles for the next five years. Reduced supervision has been highlighted by around two-thirds of practitioners with firms acknowledging they face a twofold battle to not only oversee the quality of work undertaken remotely whilst simultaneously facing the impact of increased oversight from professional bodies and regulators keen to make sure standards are maintained.

A surge in cyber, ransomware and privacy vulnerabilities because of remote working, consequences from financing and insolvency as a result of the economic downturn, both buyers’ and insurers’ expect PII rates to rise again in 2022. Most notably with cyber coverage as insurers look to make this a standalone product.

Many firms are already seeing worrying changes in terms, with more than a third reporting greater premiums and reduced coverage by at least 29%. And around 24% of buyers are also seeing a higher level of exclusions, leading to firms who cannot afford their premiums being priced out of the market. The increase in financial pressure is likely to lead to many practitioners looking towards selling or merging their firms. This opens up an important debate affecting the future of the legal profession.

In the past few years, law firms have become increasingly concerned about the cost of insurance premiums. In November’s SRA Compliance Conference, many delegates said they were struggling to meet the increase in premiums. Responding to delegates concerns, SRA Chief Executive Paul Philip confirmed the regulator was not likely to intervene, stating that firms had benefitted from years of a soft market and would “have to take the rough with the smooth”. Although Philip accepted increased PII would seriously affect firms’ profitability, he added that the regulator would only intercede if there was market failure such that it endangered its objectives and access to justice.

Although some firms may be looking for a way to exit the market, the above circumstances present wide opportunities for those firms at the opposite end of the spectrum that are looking to develop and grow. However, the potential pitfalls of the PII position should be high on the agenda of matters to consider. Proceeding with a merger or acquisition that threatens your own PII could be disastrous.

If a firm cannot obtain PII before their renewal deadline, they only have a further 30-days to secure cover. If unsuccessful, the firm will be forced to close or merge within 60-days. Partners of law practices will come under immediate fire to find a solution, and at the same time avoid disciplinary action being taken that prevents them being able to practice.

For smaller firms, a merger with a similar-minded law firm could be a solution. Whilst it could be an ideal situation for a firm willing to take over as a ‘successor practice’, with PII cover, many merger partners may insist that run-off cover is in place to protect the ongoing business from claims. However, run-off cover can be and usually is expensive, the costs of which may have to be paid by the partners of law firms personally.

There is some good news on the horizon. According to many brokers, increasing premiums will lead to new entrants and an ultimate softening of the market. Creative lenders are likely to sense an opportunity and develop new products which provides greater competition. The downside to this is that law firms will have to manage their current pressures until any improvements come to fruition.

Law Mergers & Acquisitions specialise in helping you to work out whether selling or merging is the right approach for you by looking at your situation strategically and tailoring the best solution for you and your firm. We collaborate with established PII brokers, which compliments our own services to offer you impartial specialist advice if you decide to market or merge your firm. We can also liaise with your PII provider to reduce your premiums before a sale, and in this way, you will maximise your firm’s value.

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