PII costs “not expected to fall in the near term”

Joint research by the Legal Services Board (LSB) and Solicitors Regulation Authority (SRA) has identified key trends in the professional indemnity insurance market.

The research found that the average PII premium is now equivalent to 5% of a law firm’s annual turnover but also points to the potential for continued market consolidation as one fifth of firms are paying premiums equivalent to 10% or more, of which the majority (90%) are small firms; with the report raising concerns that smaller firms may struggle to cope with rising costs resulting in passing it on to clients, inability to obtain cover or go out of business reducing access to justice.

Unsurprisingly, property firms continue to suffer the most when it comes to PII premiums property and conveyancing is seen as the riskiest area of law; identified as such because of the highest total and highest average per claim value, the log-tail risk of claims, and the increasing risk of fraud from cyber attack and impersonation; with analysis suggesting such work attracts premiums of 8-12% of turnover.

Although less affected, the report also identifies that firms who have a wills, trusts and probate team also pay a higher average premium, attributed to larger claims given the value and nature of estate planning and the similar long tail attributed to conveyancing for claims.

The risks associated with other areas of law like family and divorce, and was identified as low, reflected in premiums in line with and below with the averages found in the report; work on uncontested divorces for example is estimated to have premiums between 2-7% of firm turnover.

While the areas of law practiced are a significant factor in the PII premium, the research also found higher premiums where firms holding more or variable amounts of client money, have a history of regulatory findings, and have a higher ratio of fee earners and qualified fee earners compared to turnover.

The results also discuss cyber insurance specifically, identifying it as an important driver of PII premiums, with high impact on costs. 44% of SRA firms purchased separate cyber cover, at an average cost of 0.1% of turnover. While cyber insurance covers first-party losses such as business interruption the report states that

“we would not expect any direct link between a law firm having cyber insurance and the cost of its PII cover. We instead investigate this variable as a proxy: other unobserved factors about the firm may cause it to be more likely to take out cyber insurance, and also have some bearing on its PII premium rate.”

Firms may disagree but the report points to the hardening market being a result of historic undercharging. Reviews in 2019 by both the Prudential Regulation Authority (PRA) and Lloyd’s of London asked insurers to look at their underwriting policies and identified PII as one of the most underperforming lines of insurance, suggesting that premiums may have been set too low.

The full report is available to review on the SRA website: https://www.sra.org.uk/sra/research-publications/professional-indemnity-insurance-market-law-firms/