Think what you will about the single renewal date, but one undeniable consequence is that it ensures summer truly becomes a season of speculation. So, what are the hot topics in the hostelries this summer where those with an interest in professional indemnity insurance (PII) congregate to debate and speculate over a glass of wine? Will new qualifying insurers (QI) enter the market and increase capacity? Will the assigned risks pool (ARP) persuade new entrants to stay on the beach this summer and maybe next summer too? What will existing QIs’ appetite for risk be? Will the market become increasingly selective thereby impacting capacity and the sixty four thousand dollar question, quite literally for some firms, will premiums increase?
At the time of writing this article, at least one new entrant, First Title Insurance plc, has formally announced that it will be a QI this season and others may follow. However, some potential new entrants indicated that remedial measures taken this year to reduce the impact of the ARP on the market have not gone far enough to make entry worthwhile. It is possible that the Solicitors Regulation Authority’s staged approach to ARP restructuring may give prospective QIs an incentive to keep their powder dry until the reforms are competed in 2012, with thoughts of entering in 2013 when the proposed dismantling of the ARP is scheduled. Of course, there will always be speculation that there is a white knight waiting in the wings to ride to the rescue late in the season and, in the past, this has proven to be the case. The Law Society’s Guide to Insurers will be continually updated throughout the renewal period to provide information on any market changes.
Heading market concerns is that lenders are thought to still have a large number of mortgage default claims to pursue against conveyancers which could prove to be costly in 2011/12. Whilst it is encouraging that no changes have been made to the coverage provided under the minimum terms for financial institutions, new entrants may want to be sure that this market loss has run its course before making a commitment.
What are these changes that are considered so fundamental to market performance?
Reforming the ARP is a staged process spread across the next few policy years. Changes during 2011/12 centre on the length of time firms may reside in the ARP. Hitherto it was one year, but from October 2011 this is reduced to six months during which time the firm must address the issues that prevented it getting cover in the open market, implement solutions, obtain alternative cover or cease trading. It is not until October 2012 that changes to the funding of the ARP will transfer some of the responsibility for funding ARP losses from QIs. As for the total dismantling of the ARP, this is proposed for the 2013/14 policy year where insurers offer a three-month extended policy period to firms who cannot obtain PII for the following year after which the policy will revert to providing run-off cover.
Although existing QIs are not immune from the ARP and lingering lenders’ claims, XL intends to expand its underwriting activities outside the volume end of the profession and has indicated a willingness to consider 4-10 partner firms via insurance broker Marsh. Otherwise, the indications are that existing QIs will proceed with caution and be selective over the risks they are prepared to write. What shape, therefore, is this selectivity likely to take?
The ongoing financial downturn focuses attention on firms’ financial viability; will it be able to meet its premium payments, even if terms are offered? Certainly underwriters will pay attention to the arrangements firms can demonstrate they have in place for risk management either through Lexcel accreditation or an alternative assessment process. Uniquely for the forthcoming policy year, underwriters will be able to further gauge a conveyancing firm’s risk profile thanks to the Law Society’s Conveyancing Quality Scheme (CQS). CQS is an accreditation scheme which provides a recognised quality standard for residential conveyancing practices including ensuring that credit checks are made against firms and that they adhere to good practice management standards.
The Law Society’s stated objectives for CQS includes, inter-alia, that it will “increase consumer awareness about the importance of using a qualified conveyancer, provide reassurance about integrity; practice standards and therefore increase business”. The Law Society also claims that CQS is “fully supported by lenders and stakeholders including the Council of Mortgage Lenders”.
The Law Society has recently released figures that suggest in excess of 1,100 firms have already applied for CQS accreditation and that this number is still rising. Given this level of interest, CQS is unlikely to escape the attention of underwriters and proposals from firms which hold, or intend to gain CQS accreditation are likely to be viewed as preferred risks. In other words, CQS is likely to be an influence in the selection process. Whether your firm is in the process of applying for CQS or Lexcel for that matter, your broker should be able to provide you with a method by which you can demonstrate your quality and risk management systems to underwriters.
That brings us to our concluding question, the sixty four thousand dollar question; are premiums likely to rise this season? With the continuing influence of ARP cash calls and general nervousness over underlying, and thus far unreported, conveyancing claims by lenders, the answer would seem to be yes. Some observers predict that the increase will be between 10-20%. For some firms therefore, the summer of 2011 might end up feeling like a winter of discontent!
Grahame Davidson Dip CII Lexcel Consultant
Senior Client Manager
Tel: 0117 948 5116