Law firms insurance market update

The market for top-up professional indemnity insurance continues to be challenging, as global insurance market conditions across all major insurance product lines continue to evolve. Here we provide a timely update for law firms on what to expect and how to navigate upcoming professional indemnity renewals.

Market capacity

The Top-Up Professional Indemnity (“Top-Up PI”) insurance market for Australian law firms was already presenting significant challenges for the sector approaching the 30 June 2021 renewal season. Insurers focused on particular areas of the organisation pre-renewal such as: impact of COVID-19 (both operational and financial), cyber risk, the management of junior lawyers’ working hours, employee wellbeing, and risk management practices with respect to on-boarding new clients.

Unfortunately, Marsh have concerns that pricing generally will continue to rise within this sector of the market for the foreseeable future due in part to the low premiums applied in 2014 to 2019 which were unsustainable, the long-tail nature of solicitors’ PI claims experience, and now accompanied by the COVID-19 pandemic.

Established law firm/insurer relationships have continued to be beneficial in terms of continuing to support Australian law firms by providing capacity; however, the prevailing market conditions have often tested these relationships in terms of the premium increases applied. Insurers are also taking their opportunity to claw back premiums following a sustained period of soft market conditions where any attempt to increase premiums were unsuccessful given the levels of competition present. Law firms also experienced increases in revenue throughout 2020/2021 which contributed to the overall premium increase on programs.

During the 2021/22 renewal season, Marsh continued to deploy our placement strategy to ventilate capacity throughout the law firm PI programs and leverage the relationships held by our UK office with London insurers to obtain the most competitive cover, and ensure the PI insurance program is tailored to the firm’s risk profile.

The inclusion of the Silent Cyber Exclusion by the UK Insurers on all PI placements for Australian law firms further reinforced the importance of having a comprehensive cyber program in place. However, during the past 12 months, insurers are now in general agreement that one of two endorsements should apply to renewal programs as agreed by Lloyd’s.

Marsh are aware of continued claims being paid by insurers with respect to law firm clients over the last 24 months for the payment of many outstanding claims in prior years. For this reason Marsh expects in 2022 that we will continue to experience premium increases. Our additional concern is underwriter appetite for participation in the first excess layer (above the $2m statutory layer) as there are few markets willing to write this layer. Similarly, insurers participating between the layers $10m to $50m are showing signs of wanting to move higher up programs which brings additional challenges given there is limited appetite among insurers for this part of the program.

Insurers continue to conduct deep dives into COVID-19, cyber, business activities, claims, ESG and supply chains. Therefore it will be critically important to present strong underwriting submissions and robust underwriter presentations to markets in order to mitigate the impact of rate and premium increases for renewal.

Six crucial steps to optimise your renewal

In a challenging year for PI renewals, it’s essential for insureds to allow sufficient time to navigate a complex market. As insurers face their own challenges — and may take longer to respond throughout renewal negotiations — there are a number of steps law firms can take to help manage the PI renewal:

1. Start early: Start collating renewal submission information at least three months before renewal. It is important to discuss and agree on strategy early.

2. Be transparent and differentiate: Be prepared for insurers to require more detailed underwriting information. Speak to your broker to establish the most effective way to present underwriting information. Identify and use marketing differentiators, such as key features of your risk management program.

3. Identify your risk appetite: Work with your broker to identify organisational risk appetite, including through retentions. Understand what will be an acceptable renewal program from a coverage, pricing, and risk retention perspective.

4. Capitalise on the value of your insurance broker: It is important to partner with an insurance broker that has the experience of operating in a harder market, and has strong relationships with insurers and the decision makers to whom the risk may ultimately be transferred.

5. Use your relationships: The strength and size of a corporate relationship will be taken into account in the underwriting process. It may be effective to use insurers that are involved in your other placements, where appropriate, to secure visibility and senior management involvement, as well as maximise leverage in negotiations.

6. Stick to agreed milestones: Allow time before renewal to arrange for all capacity to be in place, and align on policy wordings. If a strict timeline is not adhered to, placement timing can lose momentum. It is best to avoid making decisions under the pressure of a current program's pending expiry.

The trusted risk advisor to Australia’s legal sector

Marsh’s specialty law firms practice brings together key brokers with extensive experience and technical capabilities in servicing our longstanding portfolio of Australian law firm clients, ranging from smaller boutique firms to four of the top six Australian firms.

We have a coordinated and well integrated approach between the retail broking team in Australia and the wholesale insurance broking team in London as well as access to benchmarking data in the US. Our global resources and experience in broking professional indemnity insurance for law firms through challenging market conditions makes Marsh well placed to deliver the best possible outcome for our clients.

If you have any questions or would like to have a conversation about your upcoming PI renewal, please reach out to your Marsh representative, or contact us.

LCPA 22/078

This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.