Beware the Ides of March…2019

OK, so Brexit Day is 29 March 2019 and not 15 March, but nonetheless caution needs to be applied over the next six months.

Underwriting law firms is an art not a science, but when applying that art consideration is given to known risks and "the known unknowns". We are often asked to consider what is coming down the pipeline in terms of future risks, and that focus is usually applied to anticipated legal events (ie, changes in EU Regulations or UK tax regimes, from which advisory mistakes may flow).

However, sometimes the bleeding obvious is staring us in the face, and recent headlines will be causing underwriters to look back and assess the claims impact of the last two recessions, so as to factor in likely exposures across the book in the near future.

Ten years on from the start of the financial crisis, the UK’s top 100 law firms hit a new record in terms of turnover for 2017/18, reaching £24.1 billion. Of course, M&A activity within the profession during this period has been zealous, thereby increasing turnover by default. Only time will tell if it has been over-zealous. Nonetheless, life has got busier for professional advisers, and that is a simple reflection of activity across the economy.

The FTSE 100 is riding high, but the broker who sells before the peak usually does best, and the mood music suggests there is likely to be a market correction in the coming months, Brexit aside. Indeed, fund manager Mark Woodford is on record as saying last December: “There are so many lights flashing red I’ve lost count.” Interestingly, his concern centred on the fascination of investors with the trendier stocks. He may well be right, and a snapshot of Bitcoin’s share price is evidence. In December 2017 it was trading at $11,000, and now languishes at around $6,700. Someone has taken a shower, and that someone probably has no idea what Bitcoin really is.

Other more recent events add to this concern. The collapse of Carillion (the largest ever trading liquidation in the UK), House of Fraser and Poundworld should not be under-estimated. However, below the surface there may be more trouble ahead. For example, Debenhams recently went to press to deny a cash crisis, and this month hedge funds placed a huge bet against Kier’s shares. Interestingly, it is understood that some of those same hedge funds did the same with Carillion.

September has also produced three areas to keep a close eye on, in terms of indicators for future claim trends:

• Home repossessions are predicted to rise due to the dangerous cocktail of unsustainably high mortgages, rising interest rates, state benefit changes and the risk of unemployment
• Linked to this, Mark Carney has predicted that a no-deal Brexit may see house prices crash by 35 per cent over the next three years (growth is already slowing)
• Subprime mortgages – it was recently reported that a subprime lender is set to sell £500 million - £1 billion of mortgage-backed securities. Of course, these toxic bonds are what caused Lehman Brothers to collapse 10 years ago and the financial crisis that then followed.

History does tend to repeat itself, but this soon?

Future impact

If 2019 brings with it a catastrophic economic event, then insurers can anticipate a four to five year period of high claims activity in terms of the legal profession, with 2008-2013 being the best comparator. A key difference being that in 2007/8 people were taken by surprise. 
There are potential changes coming to the Minimum Terms and Conditions, and whilst the timing may be opportune, these may turn out to be largely cosmetic when looking at the potential exposures that may lie ahead.

Comment

Of course, the worst may never happen but what we do know is that the UK’s economic road for the immediate future is not a smooth one, and underwriters will want to analyse closely the events that followed 2007/8.

The one thing I am pretty sure of is that Bitcoin is not the answer!