Number of closures lower than expected given rising premiums and COVID-19
The number of law firms that have closed because they were unable to obtain Professional Indemnity (PI) Insurance has increased to 60 in the last year, up from 37 the year before*. However, the number of closures is much lower than expected given the current pandemic.
Given the rising costs of PI Insurance in conjunction with the economic effects of COVID-19, there were fears that more firms would be unable to afford the mandatory PI insurance and would have to close.
During the pandemic, Government funding through the CBILS scheme and the ability to defer bills such as VAT and rent have helped preserve the cash reserves of many law firms. In addition, the closures of offices and the transition to working from home has allowed firms to save on costs. Law firms that have been able to exit excess office space at the end of leases have been able to cut their overheads even more aggressively.
At the recent October renewal for PI insurance, the number of law firms that were unable to obtain cover was much lower than expected. This is particularly promising as experts predicted rate increases of 30% in the October renewal and some firms had to accept even higher rates**.
The rise in premiums comes as more insurers reduce their capacity or exit what they see as a largely unprofitable market. There are also no new entrants who are looking to acquire a share of the lawyers’ professional indemnity market. With a limited number of insurers to choose from, this has made it difficult for law firms to shop around for a competitive rate.
Insurers are under significant pressure to increase their rates for professional indemnity cover for lawyers as they are seen as being increasingly at risk of professional negligence claims in areas such as residential and commercial conveyancing and wills & probate.
The pandemic has meant that law firms are currently facing increased scrutiny from insurers, who are looking more closely at their financial position when considering whether to provide coverage. In the latest renewal, insurers introduced additional questions focusing on firms’ response to the pandemic and how their finances have been impacted.
Andy Harris, Partner, says: “The legal profession overall has handled the pandemic and the rising cost of PI Insurance very well. These setbacks could have prompted a bigger increase in closures but most firms have seen much better than expected cashflow over the last 12 months. This is thanks to the deferral of tax and VAT payments last year and the availability of cheap borrowings through the Bounce Back and CBILS loan schemes, which have allowed them to pay their PI premiums.”
“With insurers increasing their premiums and some insurers closed for new business, many law firms have been obliged to pay the price given to them by their broker even if it is a significant increase.”
Number of UK law firm closures due to lack of PII cover
*Year-end December 31
**Howden 2021