JLT’s Solicitors Professional Indemnity team has put together the following guide to make it easier for you to understand your early renewal offer (ERO) and whether it is in your best interests to take it.
1. Offer Certainty - How certain is your ERO?
Essentially there are two different types of ERO generally available in the market. Firstly, an offer that keeps your existing renewal date (say 1st October) and asks you to commit to renewing early (usually in June or July) subject to any material changes in your risk (as defined) between acceptance and the actual renewal date. This type of offer may mean that the terms change or are withdrawn if you declare material changes.
The second type of ERO is a cancel and replace offer where your current policy is cancelled early (at an agreed date) and replaced with a new policy from the exact same date. This type of offer usually means the terms are certain from the date the cancel and replace occurs.
2. Contract Certainty - Do you have the offer of a binding contract that can be executed with clear documented terms?
Again we are seeing some quite different approaches in the market this year. The cancel and replace offers tend to offer contract certain terms that can be quickly and clearly documented.
However, we have seen ERO’s where the offer is being made by an underwriting agent on behalf of underwriters who have not yet signed a contract with the underwriting agent. It is not clear in these circumstances what would happen if the agreement is not subsequently signed, and indeed whether the terms of any such offer could then be changed or withdrawn.
3. Insurer Security – Do you have clear sight of your insurer(s) and their security rating?
Once again, the cancel and replace options are generally with signed up insurers offering certainty of security.
However, as referred to in (2) above we have seen an example where there remains the potential for an underwriting agent to change the participating insurers within their offer (where the contract is yet to be signed). In such circumstances there is no guarantee who the participating insurers will be and it is therefore impossible to check whether the security of the carriers is rated or ‘unrated’.
4. Claims or Circumstances - What acceptance criteria is your ERO subject to regarding claims and circumstances?
Generally speaking, the cancel and replace options we are seeing take the claims experience as it stands at the date the cancel and replace occurs, so there is no intervening period where a change to the claims or circumstances could take place, much like a typical renewal offer.
However, for the ERO’s where there is a significant intervening period (say from July to October), we have seen a number of different approaches. In some cases we have seen exclusion criteria for claims or circumstances already declared or for subsequent claims or circumstances where any single claim or circumstance deteriorates or is intimated with a reserve by more than a specified value, or a specified percentage of the previous year’s annual premium, whichever is the greater. Often these thresholds and the language used to describe the exclusion criteria benefit the insurer rather than the insured.
This type of approach is often referred to as a ‘claims amnesty’, but ironically does not typically allow for a reduced premium within the ERO where there is an improvement in the claims experience during the same intervening period.
5. Material Changes - What is the acceptance criteria in respect of changes to your risk?
Once again, the conditions and criteria vary where we have a significant intervening period between acceptance of the ERO and the inception date of the policy. The position is similar to that described in (4) above and can be specific to the ERO - for example increased partner numbers, fee growth or work type percentage changes and mergers or acquisitions - or it can be more generally applied where the insurer has determined there was a misstatement of, or failure to disclose, material information.
A cautious approach may be prudent here, particularly following the recent changes to the Insurance Act, where there is now generally more onus put on the insured to provide underwriters with comprehensive risk information. Completing short form proposals over an extended period can exacerbate this position and potentially increase the risks of non-disclosure.
6. Value for Money - Does my ERO offer value for money in the current market conditions?
This is a difficult question to answer as there are a large number of factors to consider not least whether your current premium terms, upon which the ERO will be based, are already competitively priced.
Here are a number of elements you may like to consider:
- Does the offer allow for relatively significant fee growth with a flat premium, say up to 10%?
- Is there the ability to extend the policy period at a discounted rate, some early renewal offers provide for this and allow you to ‘lock in’ to the lower rating for a longer period of time?
- What if my annual fees have reduced? Can I still take the ERO but with a reduced premium to reflect the reduction in annual fees?
In summary, you will need to understand whether the offer is a good deal for you, whether it represents a fair offer and strikes a good balance between you and the insurer in terms of the conditions and criteria that need to be satisfied.
We hope this guide has given you the ability to make a more informed decision and would be delighted to hear from you if you would like to discuss any of the points referenced in greater detail.