Risk Bulletin
A Winter Digest 2022
2022 Market Commentary for Large UK Based Solicitors’ Firms
The insurance market for Solicitors Professional Indemnity (PI) is shaped by the general insurance market broadly and by the results within the Solicitors PI market more specifically.
The insurance industry as a whole has been impacted by above average large losses since 2017 contrasting with relatively benign loss activity in the years prior to this. Commercial Property and Casualty insurers have been particularly challenged since 2015 and the share price performance of these insurers has been one of the worst across industries in recent years, by far trailing non-financial industries as well as the broader insurance sector. Insurers’ ability to generate profits had been degraded over a long period due to increased losses and new claim exposures in conjunction with a decline in premium rates and investment results over many years.
This led to a change in approach by the market, starting in the second quarter of 2017 with Insurers focused on generating an underwriting profit, whether by exiting unprofitable classes or increasing rates.
Within the Solicitors’ PI market this trend was exacerbated by regulators identifying this as an unsustainable class at the rates that were being charged. Many insurers took the decision to exit the class or reduce capacity and since 2017 we have seen a contraction of at least £150mln in International PI.
In recent years we have seen this trend continue with much more stringent underwriting and a focus on obtaining increasing rates across most classes.
For our 2022 renewals, we have seen a softening in the approach taken by Insurers in that we did see some rate reductions in primary layers, and excess layer rate increases were generally in the low single digits.
We expect this softening to continue for the rest of 2022 and our expectation is that we will be close to flat rate renewals in 2023.
The current inflationary environment and potential economic headwinds may see Insurers taking a firmer position so external factors do need to be taken into consideration when budgeting for next renewals.
Primary Layer
While the number of Primary Insurers for Solicitors’ firms continues to be limited, we have not seen a significant contraction in the insurers who do offer primary insurance for large law firms. The most significant change, however, has been a reduction in the willingness of insurers to insure the entire primary layer. Travelers are now the only market who are willing to entertain 100% of a Primary £10mln for new business and all other insurers look to mitigate their exposures by writing smaller lines and structuring primary placements on a quota share basis.
QBE remain committed to this class, and with Travelers lead most of the large UK based firms, but they have reduced the amount of primary capacity they are willing to deploy, typically £5mln part of a £10mln primary.
Other primary insurers for large firms include Aviva but their appetite for new business is limited and they do prefer firms without significant international exposures.
The positive news is that we have more insurers who are willing to entertain quota share participations, with HDI, Berkshire Hathaway, Axis and Sompo being the most likely to insure large firms in a support capacity. Currently, however, they are not looking to lead programmes but the hope is that this will change as their participations across large firms increases.
Primary insurers continue to stress the need for sustainable pricing but the increases in rate in recent years, along with significant revenue growth among firms has led in 2022 to minimal rate increases and, in some instances, rate reductions.
Excess layers
The excess layer PI market has hardened significantly since 2018 and while we saw further rate increases in 2022, these were moderated compared to prior years.
There does remain significant capacity available for law firm clients and most clients have been able to secure the limits required. This is additionally helped by new entrants coming into the market, most notably Convex, Munitus and Arcadian who were new entrants in 2021. These new markets are not, however, competing on price and are building their books by replacing gaps in existing programmes. There is also Bermuda capacity available for those firms purchasing the very highest limits.
Aon’s negotiation of excess layer terms across our solicitors’ renewals has been assisted by the Aon Client Treaty (“ACT”), which provides 20% pre-agreed capacity (with a number of Lloyd’s syndicates) on any layer of the programme (subject to certain conditions around the placement of the layer). This has been hugely important in hardening market conditions, and has meant that Aon has been able to complete placements at premiums quoted by the lead insurer, in cases where it not been possible to secure 100% support in the open market. We are pleased to note that we have expanded ACT in 2022 by increasing the line size available to 20% and all existing markets continued to support the facility, with the Arch syndicate coming on as a new participant for 2022. All markets are expected to renew for 2023.
Non-Affirmative (Silent) Cyber Cover
Effective 1st January, 2021, Lloyd’s have mandated that all liability insurance contracts must either exclude or provide affirmative coverage for cyber perils. This is a reaction to the UK Prudential Regulatory Authority approach to the Insurance market in 2019 advising that each Insurer must identify and manage “silent” cyber exposures within Insurance contracts, ie. where cyber cover is included in a contract but not necessarily specified. The market reaction to this is that they are looking to exclude certain cyber exposures from Professional Indemnity contracts. Aon were successful in negotiating a cyber clause that preserves most core Professional Indemnity coverage and most large Aon law firm clients were able to secure this less restrictive cover through their entire PI programmes. It continues to be important to ensure that your cyber insurance covers any potential gaps in coverage.
Russian invasion of Ukraine
Since Russia’s invasion of Ukraine insurers have been asking questions of their Insureds to understand what activities they are doing both within Russia/Belarus and for Russian/Belarussian individuals/companies. Many insurers have advised that they do not want to be doing anything that could potentially assist the Russian state which is what is driving the questions. If a firm is helping their clients extricate themselves from Russia then that is normally not a problem with insurers. If a firm is working for Russian/Belarussian nationals in work that could be perceived to support the state, then specific territorial exclusions may be added, or in some instances, insurers could decline to offer terms.