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Solicitors PI Renewal Season
The coming Solicitors’ PI renewal season will see underwriters notching up more losses unless the supporting actuaries change tack, says Raj Ahuja of EMB.
 There have been two clear sets of winners since Solicitors’ Professional Indemnity insurance was deregulated at the start of the decade: the solicitors themselves and the brokers.
In 1999-2000, the final year of the old Solicitors’ Indemnity Fund, the profession paid around £250 million in premium. By 2006, the total had fallen to around £215 million - despite years of above-inflation rises in both fee income and claims trends. Unfortunately, all of this ignores the need to pay brokerage as well! Solicitors have never had it so good.
And we all know who is paying for this largesse: the insurance industry. Combined ratios for Solicitor’s PI were estimated last year at around 160% or more. Inevitably, commentators have described these rates as unsustainable. But where is the remedial action? The early indications are that this year’s solicitor’s PI season is going to be cut-throat once again.
What is required to turn the Solicitor’s PI market around?
Experience demonstrates consistently that underwriters who have an accurate and detailed understanding of their risks are most likely to rate them in a controlled manner. This is why certain other Liability classes have stabilised and benefited from such discipline. That is not to say that these types of insurance offer easy profits; far from it. Aggressive competition is a sign of a healthy market – as long as there are technical and management restraints on underwriters’ willingness to chase prices downwards.
This quality is especially needed where you have a single renewal date, as with Solicitors’ PI, when the temptation to win at any price is all the greater. In these circumstances, it is even more important to have systems and models that enable you to assess potential business speedily and accurately.
And that brings us to the nub of the problem. Being a relatively new type of business, some underwriters are still grappling with how to rate it. Yes, they learn after the event how their portfolio has performed, but do they use that experience to their advantage? Can they differentiate between the components that make an insured desirable or undesirable? In my experience they most definitely can, but their skills here are primarily qualitative and profitability also demands quantitative skills.
Sadly, the small minority of underwriters who are genuinely savvy are up against less knowledgeable rivals willing to undercut them in a game where price is king.
So, let’s remind ourselves of a few golden rules of technical underwriting. 1) Make sure your data is recorded in a consistent and detailed manner. 2) Make full use of your data; after six years of writing this type of business you should have enough to produce meaningful models. 3) Analyse it in a similarly granular manner. The devil really is in the detail. 4) With this information, assess your risks on a component basis with risk-cost being a key, central and explicit item.
What does this amount to in practice? It means understanding risk-cost by many different criteria: for example by size of law firm; by geography; by the type of work it does; by loss severity; and by frequency. With this kind of information you will soon get a good idea of what is driving your portfolio loss record.
Now let’s look at this point in more detail, having firstly carried out several detailed, granular, studies and then aggregated to form an indicative market view.
Table One shows the results of the study by types of solicitors’ work, which are coded A to F. The columns represent severity, frequency and burning costs. 1.0 would be an average loss experience for all types.
Column 1 shows that type of work D has an average cost per claim (or severity) very much like the portfolio average, whilst type E is materially less. Column 2 shows that type of work B has a frequency rate of claims very much like the portfolio average, whilst type D is materially greater. Column 3 shows that types A and B have an ultimate burning cost broadly similar to the portfolio average, but types D and E are materially different.
Table Two shows the results of the study across different sizes of firms. Size X has an average cost per claim not too distant from the portfolio average; the frequency is materially above the average and so is the ultimate burning cost.
These selective tables demonstrate the wide deviance in ultimate burning costs within the Solicitors sector; hence the dangers of overly focusing on summary totals from poor quality actuarial studies.
The icing on the cake is, of course, a sound underwriting strategy which has the appropriate infrastructure and buy-in for execution. Fancy actuarial work means nothing if you cannot tie it in with the underwriting strategy. It is important, therefore, to educate colleagues and improve communication across technical disciplines.
The approach outlined in this article is hardly revolutionary, but it has yet to become established in Solicitor’s PI. Put in place, say, 70% of the ideal vision and you can still sit back and watch the money roll in. Alternatively, if you stay married to existing actuarial ideas you will limit your competitive advantage and you will certainly be picked off by more sophisticated players. Will this year be different or are you set for yet more hefty losses?
This article appeared in Post Magazine in June 2007
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