Playing the long game: driving down the cost of PII

By Brian Rogers FCMI, Regulatory Director at Access Legal

In the past many firms have shopped around for the cheapest professional indemnity insurance (PII) cover and in some cases, they have moved insurer every year, however, such a strategy has been very dangerous and short-sighted.

Insurers like to build relationships with the firms they are looking to cover, but they can’t do this if they have a history of just shopping around for the best deal!

Recent events in the general insurance sector over the last few years has led to a real hardening in the legal PII market, with premiums rising and firms having to close due to not being able to obtain cover; in some cases, insurers have demanded payment of excesses into escrow accounts due to concerns over the potential risk of firms not being able to pay them when a claim is made.

Covid-19 has raised some real concerns for insurers, especially in relation to residential property transactions that could be the subject of negligence due to the pressures for firms to complete before the end of stamp duty holidays. Other areas of work coming under extra scrutiny including contentious matters like contentious probate.

All firms have high fixed costs, ranging from people to IT and premises. Another is professional indemnity insurance (PII), and the costs are continuing to rise. According to insurance brokers Lockton, there has been a jump in the average cost of compulsory layer PII, of 10 to 15 per cent in the past year. Squeezed capacity in the market is partly to blame, as are a string of high-profile claims and Covid-19¹.

In its Season Review (May 2021) Lockton said “we do not believe that insurers will relax their very cautious approach and even if they do, it won’t result in any significant improvements to their pricing for some time”; so, firms need to recognise that a reduction in the cost of premiums is likely any time soon. The focus for law firm managers should be on making sure their firms are attractive and a low risk to insurers and that they can obtain cover to enable them to continue operating in the future.

Making your firm attractive to insurers is key. You first need to reduce the risk of negligence claims and regulatory breaches by standardising your processes and using automation where possible to remove human error. A central cloud-based system, with secure document management, enables you to monitor undertakings and create a clear audit trail. It also helps you to speed up the renewals process, ensuring that your application is professional and comprehensive, so you receive the most competitive quote possible. By stamping out poor practice and non-compliance, the market should become more attractive to insurers.

Summary and next steps

• Remote working has brought significant cost and time savings for many firms, though cash flow has been a concern for some.
• Law firm professionals say the pandemic has led to a ‘new-found nimbleness’ and more tech adoption, while another expert asked whether we could see the market consolidate, changing business structures and new ‘virtual’ ways to practise.
• To mitigate the impact of a hardening PII market, firms need to standardise their processes to reduce the risk of negligence claims and ensure they have all the information they need to submit a professional and comprehensive renewal application.

What to consider: Use your financial data to identify the biggest cost-savings over the past year and establish whether or not they’re sustainable over the long-term. It’s not a case of cutting further, or even maintaining current levels of savings, but channelling spend into the right areas of the business to improve cash flow, ensure compliance and serve clients well.

¹ Source: Professional Indemnity Insurance – Making your firm attractive to insurers [Access and Lockton, 2020]