Andy Poole interviews Gareth Milner, Managing Director of JM Glendinning Professional Risks to explore his thoughts on the current PII market and the impacts of growing consolidation in the market.
1. What did you see law firms experiencing during the October 2024 PII renewal?
PII pricing definitely softened during 2024. Nearly all firms we acted for saw their PII rates reduce, with insurers offering competitive renewal terms in order to retain business.
Additional capacity, expanded insurer appetite and newer entrants increasing market share all contributed to a more competitive PII space.
Unless legal businesses had a specific, recent blot on their PII copybook – such as a large/complex ongoing claim – the chances are, they saw competition for their business among insurers for their renewal, and potentially reduced rates, particularly as a proportion of income.
2. What are the main risk factors law firms should consider when preparing their PII proposals?
As ever, insurers will examine areas of practice, overall fee income and claims when generating PII premiums. We are also seeing a continued focus on the way firms manage cyber risk, their approach to regulatory matters such as AML, and the ongoing financial stability of a given practice for the future.
Insurers of medium and large law firms are also increasingly focussing on the cultural aspects of a business, including elements such as a firm’s ESG policy, supervisory procedures and staff recruitment and retention. Businesses that can show how these are woven into their everyday operations will benefit from greater choice, as these are subjects insurers are developing within their own businesses and hold dear.
3. How do you see 2025 onwards looking for law firms’ PII?
The PII market tends to be cyclical, so we expect the current soft conditions to continue into 2025. It’s important to note that, prior to the Covid-19 pandemic and the hard market leading up to 2024, PII for law firms was underpriced, with claims costs just about equal to or even exceeding premiums collected. Therefore, whether or not there will be further depression of rates and a return to that position remains to be seen.
From 2025 onwards, it is also reasonable to expect insurers to have a continued focus on the business models of emerging law firms and how they are utilising technology to manage risk, whether through employing AI, measuring and using higher-quality management information or implementing better practice management systems.
4. Is M&A activity in law having an impact on the risk profile of firms, and if so, what factors should legal businesses be considering here?
Yes, M&A in the legal sector seems to continue at pace and PI insurers have a keen eye on this. Increasingly, we are seeing situations where the definition of a successor practice is not clear cut, so firms looking to merge should always consult their broker and insurer at an early stage to establish how they want a deal to look and to obtain the insurer’s interpretation.
Acquiring firms should also consider how any business they are succeeding may fundamentally impact or change their risk profile. If they are bringing in an additional work type or team, for example, their current insurers may or may not have appetite for this type of legal work. Insurers will also want clear information around integration, supervision and risk management processes/ systems. As a minimum, PI insurers will want to see the last proposal information and claims summaries for the firm being acquired, and the acquiring firm needs to understand which insurer is responsible for claims occurring from work undertaken both before and post-completion. Increasingly, insurers of the acquiring firm are keen to see the acquiree taking ‘elective run off’ cover to minimise this risk.
Vendor firms should also remember that PI Insurers are not obliged to offer return premiums, even immediately after renewal, so the disposal of any business should ideally be aligned towards the end of a firm’s existing PII policy.
In the law firm sales that Armstrong Watson has advised on, we have managed, in most cases, to obtain refunds on premiums for mid-year disposals, although this can never be guaranteed.
M&A can create clear opportunities for law firms to improve their commercial position and risk profile too, so it is vital to ensure your broker and insurer understand the positive elements a deal will present for both sides. Very rarely do we see an insurer block or prevent an acquisition outright, but as they will be taking on the risk of the enlarged firm, it is extremely important they are given realistic information about how the new business will look.
