The cost of Professional Indemnity Insurance is higher than ever – how can legal firms deal with it?
The rising cost of Professional Indemnity Insurance is a major threat to SME law firms’ futures, but there are a few things they can do about it, says Mike Stevenson at Iceberg.
One of the most significant costs faced by legal firms at the moment is Professional Indemnity Insurance (PII), with most firms seeing it rise steadily over the last few years. Premiums have increased as much as 50% year-on-year and it’s unclear when this trend will start to taper off.
Indeed, a recent report by broker firm Lockton revealed that the outlook was ‘bleak’ for legal firms when it comes to the cost of PII, with an average increase in premiums of 27.3% reported last year.
A few factors have driven this upward trend – the premiums in recent years have not been enough to pay for all the claims insurers have settled. And it’s not simply the number of claims that’s rocketed – the value of those claims has also increased. As a result, insurers are preparing themselves for a barrage of claims, and this is driving the market’s upward trajectory.
Tips when applying for PII
There are a number of considerations underwriters take into account when quoting premiums for PII, and the Covid-19 pandemic has created a range of additional factors, with the furloughing of staff likely to be considered, as well as challenges created by remote working and other disruptions to business.
With higher premiums likely, many firms won’t hunt for the most suitable policy when it comes time to renew their PII. Our first piece of advice would be to take the time to find the most competitive deal you can – in a highly price-driven market, this will make a lot of difference.
It’s also important to remember that an underwriter is assessing the professionalism, credibility and long-term stability of your business when assessing your application for insurance, so it’s vital that the proposal reflects this. Take the time to collate and include detailed information about your firm. Think carefully about any proactive risk-mitigation steps you’ve applied since your last renewal or any actions you’ve implemented to improve processes.
We, of course, know that the pandemic created numerous challenges for the legal sector, but if you were able to respond to those with some proactive steps, you should include details of this in your proposal. Any positive changes that led to enhanced productivity, quality control, or aided cashflow, should be documented in detail.
PII and cashflow is a concern for legal SMEs
One of the biggest challenges associated with soaring premiums is the impact it’s having on firms’ cashflows, with many still focusing on building financial reserves as they continue to plan for their post-pandemic recovery.
As part of this, legal businesses will be looking at financing their PII. Being able to pay your PII in monthly instalments will make a difference at a time where it’s still hard to predict where the economy, and the industry, will be at in six months.
Business owners need to consider that vendor finance options can be a lot more expensive than external alternatives. A little extra research into independent providers will go a long way in ensuring you secure funding that’s flexible, straightforward, and tailored to your needs.
