Best’s Market Segment Report: Legal Professional Liability Insurers Address Changing Claim Trends, Emerging Risks

Following a period of depressed profitability as a result of the most-recent real estate and broader financial crisis, legal professional liability insurers have posted more favorable results, culminating in a combined ratio of 89.8 in 2017, compared with an average combined ratio of 104.6 in 2008-2011, according to a new A.M. Best report.

The new Best’s Market Segment Report, titled, “Legal Professional Liability Insurers Address Changing Claim Trends, Emerging Risks,” notes that although the recession affected the entire U.S. property/casualty market, the elevation in the combined ratio for A.M. Best’s composite of legal professional liability insurers was starker than that of the overall commercial casualty composite. The economic downturn produced a sharp uptick in lawsuits brought by disgruntled clients, and as claims frequency against lawyers began to moderate, results for the legal professional liability composite improved notably. Net income has trended favorably after sinking to $9.8 million in 2009, and in 2017, totaled $40.9 million.

Outside of a few exceptions, the companies that make up A.M. Best’s legal professional liability composite are primarily mutual insurance organizations or specialty, single-state insurers that serve just attorneys that are members of state bar associations with the principal practice in the state of domicile. Factors considered to be most critical to the success of smaller law firms include acquiring new business, addressing client demands for lower rates, maintaining cost/expense control and reducing time spent on administrative tasks. The legal professional liability insurance companies underwriting these small law firms must understand these factors in order to develop adequate risk management advice and coverage solutions.

Going forward, A.M. Best believes there are a number of trends that could temper the improved profitability in the legal professional liability sector. Claim severity is escalating, and in particular, the cost to defend legal professional liability malpractice claims has been increasing as plaintiffs have experienced greater success via persistence. Additionally, the changing landscape of legal service delivery and the utilization of enhanced technology present small law firms a new set of challenges, though improved technologies have helped decrease legal costs and improve access to legal information.

Legal professional liability insurers will need to deal with the impact of the changing marketplace on their clients. More online-only legal service providers have emerged, but the report notes that they may not be a capable substitute for an actual attorney, in terms of the ability to provide a complete array of legal services. Should potential clients decide to employ these services to a greater degree, the impact on the premium revenue for insurers of law firms likely would be negative if those firms lose sources of fee income. Moreover, the pending large-scale exit of baby boomers from the workforce will bring about further changes in workplace dynamics that could also affect premium volume.

For the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=276016.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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