Insurers, under pressure to improve profitability, are concerned about a potential increase in claims arising out of issues caused by Brexit, Covid and the extended stamp duty land tax (SDLT) holiday. As a result, cover has become more difficult for new and existing practices to access, and prices have increased.
With some insurers refusing to take on new clients, competition in the market is severely curtailed. This is a very serious issue when it is mandatory to purchase cover from that market. That said, the renewal process for CLC firms this year was smoother and less disruptive than last year.
The CLC was forced to intervene last year after two insurers, concerned that the SDLT holiday would spark a fresh slew of claims, offered firms cover that did not comply with our minimum terms and conditions (MTC) of insurance by not integrating run-off cover or by requiring very high excesses.
Given the concerns that already existed, it prompted us to review our policy and following a six-week public consultation earlier this year, in which we garnered the views of insurers, brokers and consumers as well as conveyancers, we put forward our plans for reform to our oversight regulator, the Legal Services Board (LSB).
The changes we proposed were limited but ones we considered necessary to support a healthy and competitive PII market providing affordable and proportionate cover, encourage innovation and growth and continue to protect client interests.
The LSB agreed with our proposed changes, giving them the seal of approval last month. The below new rules take effect for the insurance year that began for CLC firms on 1 July this year.
- Firms will now have to submit at least one application for PII two months ahead of the renewal deadline, with insurers required to respond no less than one month before the deadline, on 1 June, to any proposal received by 1 May.
This was proposed in a bid to reduce the risks involved when firms and insurers take renewal right up to the cut-off of 30 June. We hope this will make the renewal process smoother than it has been previously, allowing practices time to seek alternative cover if needed and be able to plan for the outcome better.
Further proposals may be submitted by practices and quotes issued by insurers during June.
Insurers will be required to issue a practice’s claims history within five working days of a request to do so, which should help practices in the process of shopping around for alternative cover.
We will also continue to work with brokers and insurers to improve the availability of cover for start-ups and firms transferring to the CLC from other regulators.
- Insurers will now be required to provide an automatic 90-day extension of cover – calculated pro rata based on the most recent annual premium – in the event that a practice is unable to renew cover. The practice must not take on any new work during the extended period of cover and, in the event that cover is found during that time, the new insurer will backdate the policy to 1 July.
This will not apply to firms whose insurer has notified them and the CLC, no later than three months before annual cover expires on 31 March, that it will not offer renewal. It will also not apply if the reason the firm cannot renew cover is that the CLC is taking action over regulatory breaches.
Our new MTC and Participating Insurers Agreement which come into effect on 1 July this year will govern the policies that start on or after the expiry date of 31 March.
- Firms and insurers will be allowed to agree a higher excess level, but only when the CLC has approved it following a joint submission.
However, the CLC is not willing to compromise client protection by allowing freedom to agree high excess unless firms and insurers come together to make a particularly compelling case.
We have also introduced a further band of maximum excesses for the largest practices, of a further 1% on fees above £1,000,001.
- We will maintain integrated run-off cover and, as is the case at present, insurers will be expected to ensure that the annual premium they collect includes a sum that reflects the risk of the insured firm going into run-off during or at the end of that insurance year.
Despite requests from insurers to introduce a separate premium for run-off with no cover if it is not paid, we concluded that the risk to consumers of run-off cover not being in place was too great. This was supported by the experiences of other regulators who do not insist on it being integrated into the main PII policy, which showed that many closing firms do not pay their run-off cover premium.
- We will not be introducing mandatory cyber cover due to the current challenge in defining the necessary features of a good policy. We do, however, urge practices to ensure they have adequate protection in place that meets their particular needs and we have added to our guidance on best practice on cyber security to assist with that.
We believe that the package of reforms we have agreed with the LSB are fair to both our regulated community and insurers alike, and at the same time meet our primary responsibility to protect the interests of consumers. A robust and sustainable PII scheme is a cornerstone of our regulatory approach, and we will continue to monitor its effectiveness during the renewal round, as we do every year.
We would urge all practices, and indeed businesses in general, to think more carefully about the trading profile they present to insurers. Firms should be able to explain the type of work they do, that they understand the risks involved, and that they have processes in place to mitigate those risks w. possible. Firms who can demonstrate this are likely to find it easier to secure cover when the next renewal comes around.
Further advice on this and other challenges facing the industry is available in our recently published Risk Agenda for 2022, available ..
Stephen Ward is director of strategy and external relations at the Council for Licensed Conveyancers