What drives PII premiums research

professional indemnity insurance

The Legal Services Board (LSB) and Solicitors Regulation Authority (SRA) have published joint research looking into the cost of professional indemnity insurance (PII) for law firms, and what factors drive differences in premium levels.

Recent developments in the insurance market have led to increases in PII costs for professional services firms, including providers of legal services. The hardening market followed a previous period of lower PII costs.

The research found that the average PII premium is now equivalent to 5% of a law firm’s annual turnover, but one fifth of firms are paying premiums equivalent to 10% or more. Of those paying more than 10%, the majority (90%) are small firms.

The areas of law a firm operates in was found to be a key factor in the differences in premium levels. The more work a firm did in property, the higher their premium would typically be, with analysis suggesting such work attracts premiums of 8-12% of turnover.

In contrast work in areas such as divorce services would attract lower premiums, with work on uncontested divorces estimated to have premiums between 2-7%.

Wider factors which may contribute to a firm being charged a higher premium rate included:

  • Firms holding more or variable amounts of client money
  • Any history of regulatory findings
  • A higher ratio of fee earners and qualified fee earner compared to turnover

Discussions with insurers suggested that although the pressures on PII costs from a hardening market cycle might begin to ease, costs are not expected to fall in the near term. This raises concerns that law firms might either pass on costs to consumers or find it difficult to obtain cover , which could reduce access to justice and hinder competition and innovation. This could reduce public trust and confidence in the sector.

The LSB and SRA have committed to work with stakeholders across the legal services and financial sectors to consider the findings of this research and establish what more can be done to further understand the dynamics of the market and support consumers.

The LSB will outline potential policy solutions to the regulators, such as different minimum terms and conditions for certain types of providers, and greater data-sharing. These approaches should help to improve market competition and more accurately calculating levels of risk.

Matthew Hill, CEO of the Legal Services Board, said:

‘It is vital that the public can be assured of an appropriate level of financial protection when they use legal services, while the cost to the profession is affordable and sustainable. The findings of this research indicate the current system could lead to poor outcomes for consumers. We will make the case for legal and financial regulators to review their arrangements and advise on potential policy solutions to better support consumers.’

The report entitled “Econometric analysis of professional indemnity insurance costs for legal service providers” can be downloaded from the LSB website.

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