The cost of a solicitors’ professional indemnity insurance premium will depend on the firm’s turnover, areas of practice, claims history and how an insurer assesses its risk.
Among mid-sized firms, a solicitors’ professional indemnity insurance cost can represent a significant annual payment. It isn’t the only figure that law firms need to consider either. If meeting the full cost upfront would put pressure on working capital, firms may look at professional indemnity insurance finance to spread costs and retain cash for other business priorities.
How much does solicitors’ professional indemnity insurance cost?
There isn’t one figure that will apply to every practice, but research commissioned by the SRA and Legal Services Board found that PII premiums were typically equivalent to 3% to 9% of a firm’s annual turnover.
The research also found that firms carrying out more property work typically paid higher premium rates, demonstrating how the nature or risk-level of a firm’s work can affect the cost.
Reviewing previous premiums can provide a useful indicative budget, particularly where the firm’s risk profile has remained broadly consistent. But firms shouldn’t assume that their next premium will mirror the previous year. A relatively stable turnover doesn’t necessarily mean the firm’s overall risk profile has stayed the same.
What affects the cost of PII for solicitors?
Insurers look at several parts of the firm when calculating a premium, including:
- Annual fee income and firm size: Larger practices will generally require more cover.
- Areas of practice: Some types of legal work present insurers with greater potential claims exposure, such as conveyancing.
- Claims history: Any previous claims and circumstances can affect how an insurer assesses future risk.
- Risk management: Insurers may also consider what controls, procedures and approaches firms have in place to manage potential claims.
- Level of cover: Buying any cover above the SRA’s compulsory minimum of £2m needs to be factored into the insurance budget.
Knowing what insurers will be looking for can help firms prepare any essential documentation early.
For a broader view of PII cover requirements and renewal preparation, access our guide to professional indemnity insurance.
The premium isn’t the only cost to consider
A firm may have the cash available to pay its premium in full, but what happens to the firm’s cash position afterwards?
By paying a sizable premium upfront, there may be other areas in the practice that will be impacted, whether that’s upgrading technology or office systems, or investing in recruitment.
Depending on when the renewal falls in the calendar, firms may also have to cover VAT, tax bills and practising certificate fees, as well as standard operational expenses. In isolation, these bills can all appear manageable, but when combined, their potential impact on future cash flow is what firms need to plan for.
How can firms prepare for PII costs?
Putting in the preparation work early can help make PII premiums more manageable.
As a compulsory liability, PII should sit within the firm’s annual cash flow forecast alongside other known commitments. Finance teams can use the previous year’s premium as a starting point, assess what’s changed in the firm’s turnover or risk profile and model different renewal scenarios.
The key consideration is the firm’s liquidity after payment is made, particularly where renewal falls close to other major liabilities or planned expenditure. That gives finance teams a more useful basis for deciding whether to pay upfront or retain working capital through finance.
Paying for professional indemnity insurance
Firms can cover their premium using existing cash reserves, but that may absorb working capital that they would rather keep for other needs in the practice.
In this case, firms can consider using external funding support to spread the cost over an agreed period. There are some additional conditions, such as interest and eligibility, which means firms will need to make a commercial judgement: what will the cost of borrowing look like versus the value to the firm of keeping cash available within the business?
Where finance is being considered, speaking to a provider early gives the firm time to assess the available terms alongside its renewal position rather than making a decision once payment is due.
For firms reviewing PII alongside other significant liabilities, a provider specialising in law firm finance can also help assess the appropriate funding options based on their unique cash positions, and enable practices to act more decisively.
There may never be a simple answer to what the next PII premium will be, but firms can control how early they plan for it. Previous premiums and changes in the firm’s risk profile can provide a starting budgeting range, leaving enough time to decide whether the premium should be paid from cash or financed before renewal falls due.