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VIDEO: With Howden Group regarding PI insurance post COVID-19

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Viv Williams:                 Well, welcome to everyone who's looking in at our Zoom meeting. We're looking at what the PI position might be on what the effect of COVID might have on law firms in the next months and years to come to a degree. I'm Viv Williams. I'm the consulting director of Symphony Legal, and with me today I've got Jenny Screech and Neil Pointon from Howden. So maybe you could just introduce yourselves if you'd be so kind. Jenny?

Neil Pointon:                 Hi, I'm Neil Pointon. I'm an associate director at Howden Insurance Brokers. We're specialists in professional indemnity insurance and, in particular, for solicitors and those firms that need to meet the requirements of the SRA's minimum terms and conditions.

Jenny Screech:              Hi, my name is Jenny Screech, and I'm a consultant with Howden working with the solicitor's team. By way of background, I have also historically been a solicitor in private practise. I have worked handling claims against solicitors, and for many years I was underwriting with Zurich solicitors' professional indemnity.

Viv Williams:                 Great, thank you, Jenny. So I suppose really the whole purpose of this meeting is to talk about the impact of how we see what this virus will have on the profession. And I suppose one of the first questions that we'd like to talk about is what do you think will be the overall view of insurers on the current crisis and what impact this will have on professional indemnity premiums when we come up in October? Perhaps, Neil, you'd like to lead with that one?

Neil Pointon:                 Yeah. I mean, obviously this is a very broad overview question. COVID-19 is bad news for everybody, and it certainly is the case in the insurance industry. We're going to see losses arising from COVID-19 across the insurance sector, which weren't previously budgeted before, and that is going to have an impact on capacity for all sectors, I believe. And unfortunately, the professional indemnity insurance sector for solicitors is no different, and we're already in a hard market anyway. So I'm afraid I'm expecting more claims to come out of this, whether that's because people are working from home and their risk management positions are exposed, or for whatever reasons. We're also expecting people's incomes to drop. So it's almost the perfect storm, I'm afraid. But I would say this, that at Howden we've found working from home to be quite straightforward, and as far as it's possible, it has been business as usual. And at this point in time, there have been no insurance pullouts of the solicitor PI market.

Viv Williams:                 Yes, it's interesting. I think one of the things I've noticed that law firms in particular thought that they couldn't trust their staff to work from home, but they found they can, and I think... I've spoken to many firms who've said, "We have three offices. We've closed two. We're only going to have one from now on." People can work from home and do it effectively. Robust IT systems have been absolutely fantastic, and those firms have invested heavily in IT. So I think that's very, very relevant to this particular question. So looking at sort of second part [crosstalk 00:03:44]. Sorry, Neil.

Neil Pointon:                 I was just going to say, I didn't think I could trust myself to work from home. I thought that I'd be watching television and things like this. I've never been an advocate of working from home for myself or for anybody else. But if anything, I've found that I'm probably been more productive with less distractions. There is the issue, of course, keeping yourself motivated to get up and do it every day. But if, I'm afraid to say everyone, I'm happy to say, that the pressure of work has forced me into this little room to carry on working possibly harder than before.

Viv Williams:                 Yeah. No, that's very relevant, I think. So in terms of the renewals that cropped up... Was it last month when we had renewals coming in? What has been the impact on those firms that are renewing then? Has there been some reaction?

Neil Pointon:                 Yeah. So the last major renewal season was the 1st of April. And obviously we went down into lockdown a week before that. So although some firms like our own actually went down a week before that as well. So it could have exposed the system. We could have gone down like a lead balloon. But as it happens, as I mentioned previously, we found that our IT systems were both robust enough. We found that communication was maintained with insurers, and therefore we were able to handle the renewal season reasonably comfortably.

                                    But in terms of your direct question, did the coronavirus or COVID-19 issue affect the first batch of of renewals, I would have to say relatively not, if anything at all. And the reason for that is that the insurance market tends to be reactive, and it hadn't had any time to really consider changing rates. It was too late, too close to renewal season. So people pretty much got what they would have got if COVID-19 hadn't been around. I think the only impact it had was that because of the problem with communication, the clunkiness in the system, the initial clunkiness in the system, it meant that people were less likely to achieve an alternative quotation in good time because everything, unfortunately, all professional indemnity insurance for solicitors, it is bespoke. It does require a full proposal form individual claims summaries that there aren't really any commoditized products out there because underwriter wants to see what they're writing in all cases at this point in time.

                                    So due to the volume of information that had to go from A to B, maybe they're one or two less additional quotations available for the 1st of April. But all in all, I'd say that anybody who renewed the 1st of April or had any problems in renewing from the 1st of April, barring their own personal illness, there were no effects from COVID-19.

Viv Williams:                 So that's been useful, and I suppose the big move is in the next few months and what happens. I mean, obviously we've seen many firms furloughing staff and people working from home, and I wonder what impact that means in terms of future claims and future risks. Jenny, do you have any view on that?

Jenny Screech:              Yes. Certainly with the new arrangements and people working from home and furloughed our staff, that just adds to the risk profile. And what we know is where there is added risk there is added potential for claims, and there's been quite a lot of commentary in the press over the last few weeks about the potential fallout in terms of professional indemnity claims. When it comes to working from home, insurers are going to be really interested in how that's being managed. Have supervisors been accessible and have they supervised? Have the IT systems been sufficiently robust? Has client confidentiality been protected? And what arrangements have been made for things like signing and witnessing original documents?

                                    So those are the kinds of issues that I think the insurers are going to be focused on as we move towards the first October renewal. And we know that some of them are looking at adding questions to their proposal forms. In terms of furloughed staff, I think there are issues there as well because they will have had open files. And again, insurers will want to know what arrangements have been put in place to make sure that that work has been done. So I think that firms need to keep in mind the importance of detailing to their insurers on renewal what these arrangements are going to be because it will be some time before we properly understand what the fallout has been because we know that this is such a long-tail business.

Viv Williams:                 And do you think there'll be a massive impact on premiums coming up to the 1st of October because of this?

Jenny Screech:              By the time we get to 1st of October we're... I think that the claims activity won't really have started to emerge, and it depends on the view that underwriters are going to take on the added risk. We are in a hard market at the moment. We're in the hardest market that we've seen since the profession voted to move to the open market. And to the extent that insurers are concerned about further claims impact, then we may see further hardening of the market. Time will tell.

Viv Williams:                 Yeah, it's obviously a difficult time. I mean, a lot of firms are talking about their turnover being reduced by anywhere between 40 to 50% in terms of their income. Will that impact on the actual renewal premiums?

Neil Pointon:                 Yeah, that's an interesting one, isn't it, Viv? I suppose it depends when your financial year ends because if your renewal date is the 1st of October and your year end is the 1st of September and your income has fallen then professional indemnity insurance tends to take the last key financial year as the most important year for rating factors. So if that has happened in that time, then there is an argument to possibly hold off some of the premium increases that might have been coming your way. If, however, your financial year end is the 1st of April next year and your policy is due for a new one on the 1st of October this year, then despite the fact that you may be anticipating your income going down, underwriters will tend towards of the last complete financial year, which will be for the 1st of April '19.

                                    And regardless of this, the underwriters do tend to use three year or five year rolling averages anyway. So as much as it might... people may be wishing that as their income has reduced by 50%, surely their PI improvement will drop by 50%, but that's very unlikely. And in any respect, the fact that the market's hardening, the market could harden less quicker weight than the 50% drop in the fee income. And there is something I'd like to add about the 1st of October renewals that are coming up, which is that solicitors are in a good position from a cover point of view in that their professional indemnity insurance is mandated by the SRA's minimum terms and conditions. And as we understand it, the SRA are unlikely to cave in and add in any extra exclusion which the insurance market may wish to impose, which may make cover less comprehensive. Do you agree with that, Jenny?

Jenny Screech:              Yes. I mean, certainly to change the minimum terms and conditions is a very long process. And in my view, some people will need be time to achieve that between now and 1st of October. And certainly my understanding is that as far as the MTCs are concerned, it's business as usual.

Viv Williams:                 Okay. That's fair enough. Interesting, in the last few weeks we've seen one of the first major 30 million turnover law firms fail in terms of McMillan Williams. I just wonder what in terms of your view is on the impact of larger firms failing in this current crisis and what that means for PI and premiums?

Neil Pointon:                 Yeah. So there's two types of that. In terms of the failure rate for large firms or small firms, I think that it's probably accepted that prior to this problem, prior to COVID-19, there were a number of firms that were clinging to life in terms of financially that possibly were very close and reliant on bank loans to continue trading, and maybe didn't have the right economic goal in place anyway. And I think that this... the COVID-19 has acted as a catalyst to push some of those over the edge. So I do think that we will see an increased volume of failures, but having said that, I do think that there are... There's a lot of firms there that are good firms, and are prepared to dig deep and fight for their existence.

                                    So I don't think it's going to be a deluge of financial failures, but I think there are going to be some significant ones and more than you'd normally expect. And the issue that's really there for the professional indemnity market is the issue of run-off cover because I think that we're going to see more cases whereby firms go into insolvent administration or liquidation. And the ability for them to pay their very substantial run-off premiums is going to be questionable, and that's going to leave insurers with a whole lot of exposure without the expected premium to go against it. So again, it's going to add, I'm afraid, to underwriters considering increasing their rates. But like I said, I think the key to how far the market's going to go will be whether or not there is any more, any further withdrawal or capacity, any further insurers who basically say, "Oh, we're not offering terms going forward." And touch wood, right now we're not aware of anybody saying that.

Viv Williams:                 Okay. It's interesting because I must admit I've had numerous calls from, excuse me, managing partners are fairly small, you would say, firms who are unable to get some of the government support. They can't get C-Bills loans. They can't get bounce back loans because their cash position is so bad. And I think it's a matter of time before many of them will actually fail. And I noticed it because combining a couple of questions together, but I noticed the Gazette talking about 70% of the High Street disappearing. I think that's probably a little pessimistic, but in reality, it's very concerning about where the market is good to go. I can see numerous smaller firms failing. Do you feel that's... Is that prevalent from what you're seeing yourselves?

Jenny Screech:              I think-

Neil Pointon:                 I'm mean, you're always going to... Sorry, Jenny.

Jenny Screech:              Yeah. I think this is going to be an issue, particularly as we move towards the first October renewal, because we know that PI is a very significant spend for law firms. And as we've said, we're in the hardest market and what we also know is that to secure your PI cover, you have to pay for it upfront or have very, very firm confirmation of the finance arrangements because once insurers the wrong cover, they can't cancel. Those are the rules.

                                    So I think that 1st of October may well crystallise this issue for many firms. It's something that firms really need to start to think about now and plan for. Certainly the Howden advice to firms is start thinking about your finance arrangements now because that is going to be critical and it's going to be key this year. And for those firms that aren't going to be able to finance the premium then there is the extended periods there that would enable them to conduct an orderly closure. But my view is that if you think that that's where you're headed, you should start to address that now and look at whether there are some merger opportunities or alternative solutions while you've got time to do that.

Viv Williams:                 I think that's a very fair comment, Jenny. I think the amount of calls I'm getting about mergers on specific types of smaller law firms with legal aid support, et cetera, they're looking now to find a solution. But of course, it's very difficult to find merger activity in this current market. It's a tough old place. It really is. So I thank you for that. So in the press we saw last week the SRA announcing an extension to this period of potential... where you're going to an organised close down. What does that mean? There's a 90-day extension?

Neil Pointon:                 Yeah. So the coverage already... The minimum terms and conditions already apply for an extended indemnity period of 90 days. Whereby 30 days of those you can carry on as normal, and 60 days you have to take no further instructions and just go into run-off effectively. And this would apply whereby you're not able to obtain further cover at the end of your current policy period. So if you're due for renewal on the 1st of October, and you fail to arrange any further cover, whether insurers like it or not your current insurer has to provide this extra 90 days. And that gives you a chance find alternative quotations, perhaps, and get out of it, or alternatively it gives you a chance to be acquired, or perhaps it means that you have to go into run-off.

                                    And then there's the huge cost of the run-off premium to take into consideration. The thing about that is it's automatic. You get it whether you want it or whether insurers are offering it or not. You don't have to ask for it. It's automatically there whether you ask for it or not. If you haven't got cover, ergo you are in the 90-day period. You are supposed to advise the SRA that you are in this position. Obviously, the SRA will be worried and concerned for you in that case and, therefore, may increase their supervision of you.

                                    And, really, you don't ever want to go into this 90 days because it does raise question marks, and it could be that any future insurer will say, "Oh, why did you end up in that position?" Because it either suggest that you're poorly run or that you've got some problem that your present insurer didn't want to offer terms.

                                    So on the face of it, doubling that 90 days to 180 days, you might think, "Well, that gives even greater flexibility." And I understand that the SRA came up with this plan because they were concerned that individuals either at the firm or at the firms' brokers or at the firms' insurers weren't available to organise their cover. In other words, it was a perfectly reasonable firm, they just... communication had broken down and they needed some more time. The problem with that is that they've said that it is subject to insurer's agreement. So therefore, there does need to be somebody to do the negotiation to have it. It's not automatic that you go from 90 to 180 days. You have to be able to speak to somebody. Simply, you also have to, I think, get approval or advise the SRA.

                                    So you've got 90 days now. They're suggesting 180 days, but the 180 days would be subject to somebody being able to organise it, somebody being around. And the reality is that if you're going to do that, you'd be better off having spoken to your insurers if you are around to do the negotiation and to have asked them if they could organise a standalone, a standard extension to your policy, i.e. nothing to do with the extended indemnity period. Your policy period was 1st of October '19 to 1st of October '20. Now you say, "Can I have a month's extension because I'm not quite ready. My practise manager's been off ill," or whatever the score is, and hopefully underwriters would be prepared to do that. That is available today to ask that question.

                                    Your problems occur where you come off the back of a long period policy, say an 18-month policy period, whereby underwriters aren't capable of giving an extension because their reinsurance doesn't allow for a further extension. And in those cases then perhaps consideration could be given for a short period policy, whether it's a month or three months, just to get you over the hump. And again, insurers aren't going to want to do that, generally speaking, because it's just too fiddly. But if everybody's trying to assist in these difficult times, then maybe that's a bit of extra flexibility.

                                    So I guess what I'm saying, Viv, is that I think that the SRA's suggestion sounds like a good idea but in the circumstances which they're outlining, which is where there's nobody around to organise the extra cover, then who's going to organise the extra 90 days on top of the 90 days they've got?

Viv Williams:                 Yeah, that's a very difficult one to anticipate. I just wonder... Obviously, I read it and I thought it's a really interesting statement, but I couldn't quite work out what it meant. So that's really helpful. What we're seeing now with the sort of beginning of the lifting of lockdown is that quite often firms are actually bringing people back into their offices. So we're starting to see between... and the anticipated numbers are between 25 and 50% of staff coming back to work in their offices. What impact would that have on PI with half the staff working from home, half the staff working from obviously socially distanced office?

Jenny Screech:              Again, Viv, I think it's all about having a properly considered plan. And, yes, firms are going to need to make adjustments in terms of the numbers of people that they can have in their office. To the extent that they can only have, say, 25 or 50% out people in their office, obviously there's opportunity for other staff to work remotely, which again gets us back to how robust are the IT systems and supervision? And that's a solution. To the extent, again, that they're going to continue to leave staff on furlough, they will need to ensure that they have got suitable arrangements to cover the work that they've got.

                                    So from the insurer's perspective, they will understand that people are going to have to make practical arrangements, but what they will be looking for is confirmation that there's proper planning around that. There's proper risk processes that have been put in place on top of that. And I really can't stress strongly enough the importance of firms actually detailing this when they apply for their next renewal, whether that's October or April next year. Now, as we see it, we expect that some insurers are going to include set questions around this, but we always encourage people to provide supplementary information and giving insurers some detail about how you managed the problem. How you've addressed risk is going to be absolutely key in terms of giving them that reassurance.

Viv Williams:                 So, I suppose, coming to the end of this conversation, but what advice would you both give to firms getting ready for their October renewal? What can they do now in readiness for it? Is this preparing the information early? What would you say?

Jenny Screech:              Yes, absolutely. And, in fact, in April we put out a bulletin with a five-point action plan, and the first thing that firms should be doing is picking up their phone and speaking to their broker because your broker will be there at the end of the phone, and they'll be able to talk firms through what's happening in the market with reference to their particular insurer and what that means for their particular firm. Because it's all very well to read information in the press about the rate at which premiums are increasing, but every firm is different. And you need to understand what that actually means for your firms.

                                    So the first thing is absolutely pick up the phone. The brokers are there ready to chat. The second thing is then agreeing a timeline with the broker, making a plan, agreeing when your submission is going to be ready. And then, I think, what will also be really important this year is setting those timelines within your own firm because they always... the proposal forms always take longer to complete than people expect. And it's going to be more difficult if people aren't in the office in terms of gathering the information. So having a clear timeline, really important. And then putting time into the preparation of the submission. And as we said earlier, it's a significant spend and it justifies a significant input of time, and this year moreso than ever.

                                    The other really key thing at the moment is to revisit the budget. Because as we've said, it's a hard market. You need to go back and look at what's in the budget in line with the discussion that you've had with your broker. And right now, start thinking about the financing. What is the firm's cash position? What is its ability to get financing? And making sure that you've got a really early view and early plan on that. So worst thing is to be scrabbling about with that when there's only a few days to go,

Viv Williams:                 That's good advice, and I appreciate that, really. For all the firms that we work with, I'm sure they'll take great value from that. I mean, we've also got the change in the Solicitors Indemnity Fund protection. It's the post six year run-off claims. It's just changing this year. What impact do you think that will have on firms?

Jenny Screech:              Yes, this is an interesting one and obviously very topical, and it relates to closed practises. And for some years now, SIF has been providing cover when the six year run-off cover ends after a firm has closed, and the cover has been automatic and there's been no premium payable. And it's provided huge peace of mind for particularly retired practitioners and others who've closed their practise. Because we all know that there are claims that do arise after the standard six year limitation period, and quite a significant amount of claims. So this is a real issue. It was back in 2016 that the SRA said, "Well, the sub surplus is finite and we're going to bring an end to this cover, 30 September 2020." So, this issue has been sitting out there for quite some time now, but a solution hasn't emerged, and the law society has been looking at this issue closely and haven't come up with a solution.

                                    The market has been playing its cards pretty close to its chest. And we think that if this does proceed on the 30th of September, then there may be some insurers who are prepared to offer on cover. However, if they do, then it's unlikely to be minimum term cover. It will only be offered to firms that do have the appropriate claims record and will need to be paid for upfront. And it would likely only be an annual policy. So, we have yet to wait and see.

                                    What happened just in May, the SRA at a board meeting made a decision that they would undertake some further actuarial analysis in relation to this. So we're now waiting to see what the outcome of that will be. And they say that it's been prompted as a result of the pandemic crisis, but frankly this issue was always the in needing a solution that hadn't emerged. So we're going to have to await the outcome of that. But the clock's ticking. We will very quickly be at the 30th of September. So certainly our advice would be that any effected solicitors, it may be that they closed their firm, but are still in practise, or it may be that they're retired. They should speak with their broker about it and certainly keep in touch with what is happening and what the potential options are that may emerge.

Viv Williams:                 That's great, Jenny, and thank you for that advice. And I suppose, finally, the people will be looking and solicitors will be looking now at their renewal and what's going to happen. What do you two predict what might be the outcome of premiums as of the 1st of October?

Neil Pointon:                 Well, I'd just like to say, we've covered a lot of interesting points, or I think a lot of interesting points today, but-

Viv Williams:                 You're good, Neil.

Neil Pointon:                 We're currently working on our summer market reports. We do one in January. We do one in summertime. And that's going to be out very shortly, and it's going to cover all of these issues we've talked about. So it's going to cover how the April renewal season went. It's going to cover how the market's going forward. And Jenny, have we got a view when that's going to be out, available?

Jenny Screech:              Certainly in a couple of weeks.

Neil Pointon:                 Couple of weeks.

Jenny Screech:              Yeah.

Neil Pointon:                 So for everybody out there, keep your eyes open. And if you want to contact us after this, then we'll put you on the list. But answering your question directly, I'm sure this won't surprise you from the tenor of the conversation we've had so far, we're envisaging the hard market to continue to get harder in the first fall term, but Jenny's advice earlier about getting your proposal form completed earlier, or at least started earlier, and having regular discussions with your current broker and insurer so that you know where they stand. So you know where they are when you need them is great advice. But as I mentioned earlier, at this point in time, no insurers, participating insurers, have pulled out this year, and therefore I hope and I believe there will be enough capacity to provide cover for all risks on the 1st of October. But unfortunately, yes, expect premiums to rise, I'm afraid to say.

Viv Williams:                 Any other comments, Jenny?

Jenny Screech:              No, I think Neil summed it up nicely there. This is a hard market and things are just being made that much more difficult because of the situation that we're in. However, we're here to provide whatever help we can.

Viv Williams:                 Well, I've worked with you for a number of years now, so I'm obviously very comfortable about recommending Howden to all our clients. Thank you very much for your time today. Obviously very, very difficult market. I know the word unprecedented times has been overused, but I have to say, I can't think of another word that's probably better at the moment. I've never known anything like it in my lifetime. It's quite a remarkable situation that we found ourselves in. But thank you for your information. Thank you for your help, and look forward to working with you in the near future. So thank you both for your time.

Jenny Screech:              Many thanks, Viv.

Viv Williams:                 Thank you.

Neil Pointon:                 You're more than welcome, Viv, and it's a great pleasure to work alongside Symphony Legal. We really appreciate that.

Viv Williams:                 Thank you. Thank you both.