Operating since 2001 as a wholly owned subsidiary of the Queensland Law Society Inc. (QLS), Lexon Insurance Pte Ltd (Lexon) is a captive insurer providing professional indemnity insurance to QLS members in accordance with the terms of the Queensland Law Society Indemnity Rule 2005 (Qld). Lexon insures almost 2,400 law practices, each of which has at least one office or resident principal in Queensland. These 2,400 practices comprise over 7,750 Queensland PC holders and 800 interstate practitioners.
In addition to its primary role of providing the compulsory ($2M each and every claim) professional indemnity cover required by each practice, Lexon also offers optional top up cover (to a maximum of $8M) for those seeking greater insurance protection based on their individual needs.
Lexon’s incorporation in Singapore delivers significant savings for the profession in terms of regulatory compliance costs. Lexon’s board has nonetheless elected to measure its solvency against key Australian Prudential Regulatory Authority (APRA) standards – some of the most robust in the world – with all related actuarial work being undertaken by leading Australian firm Finity Consulting Pty Ltd. Lexon is also an Australian resident taxpayer.
To provide class leading professional indemnity and risk management services to legal practices, through the maintenance of a viable scheme and the delivery of products and services that meet member needs.
The performance of the insured profession during 2021/22, in the face of ongoing COVID challenges, was both pleasing and surprising. After an unexpectedly robust 2020, we saw turnover for the insured cohort in 2021 grow by around 15% to some $2.72B. This was the largest year on year increase we have seen, driven by phenomenal growth in the conveyancing and commercial areas.
Growth of this magnitude brought with it a heightened risk of claims from practices being spread too thin and thereby “over busy”. As the profession’s insurance partner, Lexon was cognizant of this issue and provided focused messaging as part of its risk management strategy for the year.
Lexon prides itself in being an industry leader in risk management. The tangible benefits delivered in past years encouraged us to continue the expansion of our award winning program during 2021/22. We now invest over one third of our operational budget into risk initiatives – a commitment unmatched by our contemporaries in other jurisdictions – which has helped achieve the impressive claims performance we now see from the profession.
Lexon’s financial performance is largely driven by outcomes in two key areas – claims and investments. 2021/22 delivered an outstanding claims expense of $7.9M (against a budget of $19M) which provided a robust buffer against investment losses (realized and unrealised) of $6.5M for the year, some $10.8M short of budget.
Operational expenses remained 8% under budget, with all major internal projects delivered on time. This was particularly pleasing given the challenges faced during the period, including an office renovation and the roll out of the new QLS renewal system.
Lexon’s overall result was a $1.7M profit, well above budget and an exceptional outcome given the investment volatility. This profit will be reinvested to further support our insured members.
The prudent management of the scheme permitted 2021/22 insurance rates to be held at their lowest levels (save for the special 2020/21 COVID subsidy) since the introduction of the Gross Fee Income model in 2007/8.
The financial management of the scheme during the year is a fundamental driver for the low insurance rates practices now pay. However, Lexon’s relationship with practitioners extends well beyond the financial, with our internationally recognized risk program continuing to improve risk awareness and resilience in the face of new and emerging threats, whilst our claims team seeks to manage claims in a cost effective and sensitive manner.
The new COVID norm of remote working continued to challenge the provision of Lexon’s flagship risk program in 2021/22. As always, innovation and technology provided the key to ensuring the risk message, and the profession’s needs, were not ignored.
Over the period, we delivered:
The claims and risk teams are Lexon’s key interface with the profession and their skill and professionalism continue to be hallmarks of Lexon’s overall success.
We regularly monitor the effectiveness of our interactions, and the risk team received an overall favourable response rate from practices visited during the period of well beyond 90%.
A claims satisfaction survey for the period up to 30 June 2022 also delivered a 85.9% satisfaction rate, well above average within the insurance and financial services industries.
Whilst these results are pleasing, we will continue to strive for further ways to improve our service in 2022/23.
In light of the challenges faced in 2021/22, the performance of Lexon has been particularly pleasing. The insurer remains well capitalized and is staffed by an experienced team ready to meet any new challenges that the profession may face.
We acknowledge the support and insights offered by QLS Council during 2021/22 and look forward to continuing our successful partnership into the future.
We also continued to provide our innovative, bespoke online cyber education program which was accessed over 14,300 times by practitioners and their staff during the year. This has proven to be a valuable tool to further disseminate our key cyber security messages.
2021/22 result of a $1.7M profit well beyond the budgeted $0.5M loss Moreover, this was achieved despite our externally managed investment portfolio delivering losses of $6.5M for the year – some $10.8M short of budget.
Capitalisation targets fully met.
Standard levy rates contained at lowest ever levels since introduction of GFI model (save for COVID rebate in 2020/21 which reduced rates even further).
The outstanding 2021/22 claims expense performance of $7.9M against a budgeted $19.0M – an outperformance of some $11.0M
2021/22 reinsurance program placed at prices materially below the industry average increase and with full third party cyber cover.
Class Order Exemption to incorporate “claims handling and settlement services” successfully obtained obviating need for the additional regulatory burdens of an AFSL. Lexon also supported other impacted entities (including WA and SA) to achieve relevant exemptions.
Delivery of key operational processes well within expense targets (8.0% under budget).
Top up program for 2021/22 successfully delivered with:
• full reinsurance
• only 5% cost increase (despite the insurance market conditions suggesting a significantly greater increase)
• take up increased by 13.1% year on year
Full office refurbishment delivered on time and on budget.
Lexon is required to have a minimum of 2 and a maximum of 10 directors of which:
• Two shall be members of the Council of QLS wor nominees of the Council; and
• One director shall be a resident of Singapore.
Lexon currently has 8 directors, of whom 2 are QLS members/ nominees and one a Singapore resident.
The board formally convenes regularly during the year. In addition, the board holds a strategic planning meeting each year and meets on an ad hoc basis as and when required.
The board has established committees to assist it in carrying out its responsibilities.
The board undertakes a regular internal assessment process at which potential improvements are discussed and, where appropriate, implemented.
This committee is responsible for the oversight of the claims management function including policy coverage in individual cases, claim reserving and the assessment of any significant trends.
It undertakes a detailed assessment of large claims and any indemnity issues.
This committee oversees:
• The financial reporting process to ensure the balance, transparency and integrity of published financial information.
• Investment of company funds in accordance with the company’s investment policy.
• Corporate risk issues.
The role of the committee is to oversee the profitable and long term sustainability of the underwriting function, including the provision of recommended levy models and placing reinsurance programs. It also supports external risk management procedures directed at identifying, isolating and remedying loss producing activities within the profession.
The committee is charged with the responsibility of overseeing the selection and management of the panel of lawyers that provide legal services to the claims team.
The committee maintains a degree of independence from the board to ensure that matters within its ambit of responsibility are resolved, and are also seen by all stakeholders to be resolved, in a fair and equitable manner.
As at 30 June 2022, 315 general insurance files were opened for the year. This is lower than the 2020/21 year (328) and the lowest total since 2016/17 at the same point in time. This is a remarkable achievement given the continued growth of the profession.
The 30 June 2022 actuarial assessment for the 2021/22 year was an expected central estimate of $16.9M (nb: actual incurred value at 30 June was $10.6M). This is consistent with the trend we have seen since 2011/12 where the central estimate for that period now averages $16.1M. The actuarial assessment also confirmed an overall collective improvement in the performance of recent policy years (from 2017/18 to 2020/21) with central estimates for those years, as a whole, decreasing some $3.5M from the same time last year.
A combination of an excellent initial estimate for 2021/22 and earlier years outperforming the actuaries’ estimates delivered an outstanding claims expense for the year of $7.9M.
Conveyancing matters represented the largest value area of law within the portfolio, which is perhaps unsurprising given the substantial increase in conveyancing work undertaken during the year. Proportionately, conveyancing (both residential and commercial) represented 38% of the files and 35% of the overall portfolio value.
Commercial claim values fell substantially from recent years (2021/22 at $1.9M cf. 2020/21 – $3.2M; 2019/20 – $3.5M; 2018/19 – $4.4M). Whilst this part of the portfolio may well develop further into the future, the current figures suggest it will be a very good year for that area of law.
2021/22 appears likely to continue the excellent claims performance of recent years2021-22 Last 20 years: 2002-03 to 2021-22
• Conveyancing at 35.0% represents the highest value area of law for 2021/22 and it remains the highest component of the overall portfolio since 2002/3 (33.3%). This result reflects the number and value of conveyances undertaken by insured practitioners in Queensland.
• Commercial claims for 2021/22 were quite benign compared to the long term average. Nonetheless, with an overall portfolio value at 31.4% since 2002/3, commercial may soon supplant conveyancing as the largest single area of law in the portfolio (by value).
• Wills & Estates represent 14.2% of the 2021/22 incurred, well up on the historical average of 5.5%. Recent years have trended higher due in no small part to the increasing value of estates. A similar experience is found with family law (10.1% against a long term average of 4.7%).
• Personal injuries has maintained its good performance of more recent years, now with only 8.4% by value against a long term average of 12.4%. Personal injuries remains one of the Lexon “success stories” following the creation of the PI risk management tools.
The claims team records feedback from practices with a concluded claim (whether managed direct by that team or in conjunction with panel (where appointed)) to ensure that any learnings are implemented into our future interactions.
For the period 1 April 2021 to 30 June 2022:
• 148 surveys were sent
• 65 responses were received
• Response rate = 44%
The results delivered a customer satisfaction score of 85.9%. By way of comparison, the customer satisfaction score average for property/ home insurers is 78% and for financial services 77%, with a score of over 80% considered the “gold standard” 1 .
Both LawCover and the Legal Practitioners’ Liability Committee (LPLC), respectively the NSW and Victorian based legal professional indemnity insurers, see their five year claims estimates trending upwards from 2017/18. Lexon, on the other hand, has seen its trend line decrease over the same period. This is an outstanding achievement and testament to the hard work and expertise provided by our risk and claims teams.
1 Per monkeylearn.com accessed 26 July 2022
Lexon takes a project management approach to handling claims, which is implemented via the Active Resolution Management (ARM) philosophy. ARM seeks to ensure that:
• A clear direction is set for each claim and that the actions taken in managing the claim support that direction.
• Claims “drift” is avoided.
• There is a “common mind” as between the stakeholders to the claim – the insured, Lexon and the panel solicitor.
• All issues are identified and managed at the right time.
• Costs are controlled and monitored.
• The impact of all decisions in relation to the claim are assessed prior to that decision being made.
Lexon’s capacity to deliver on this philosophy depends very much upon the quality of its claims solicitors. Noel Greenslade leads a dedicated team of claims handlers, each of whom is legally qualified and has many years’ experience in handling professional indemnity claims. This team works closely with Lexon’s legal panel to deliver the best results possible for our insureds.
Lexon continues to work hard to enhance our productive partnership with the profession so that risk mitigation strategies become embedded in each and every practice.
Unlike most insurers, Lexon is able to make long term financial commitments to risk management because it is not required to focus on short term returns to shareholders. This means we have been able to grow and develop our strategy in a way that delivers the best long-term result for insured practitioners.
Our risk team, by team members, is the largest within our company. With 9 full time staff it is twice the size of our claims department.
In terms of budget, in 2021/22 we set aside $2.6M to fund our risk initiatives ($2.2M in direct costs), which equates to over 34% of the overall operational budget to run Lexon.
Lexon’s flagship workshop program is our frontline defence against claims and a key contact point with the profession. We did not allow COVID restrictions and flooding to stymie our efforts in 2021/22 and utilised virtual options such as Zoom and Microsoft Teams to continue our programs where necessary during this period. Seven (out of nine) of our team are dedicated to delivering these workshops which are divided into three main categories – general, system test and cyber.
The development of our tools progressed unabated in 2021/22, with a key initiative being Project Embed where we take elements of our current tools and embed the risk prompt elements further into the legal process. For example, rather than a checklist to review due diligence searches which then necessitates a separate report be prepared to the client, we produced a skeletal due diligence report with the relevant prompts contained within it. Our Reverse Mortgage and Commercial Objective letters released in this period are further examples of this approach. We consider this further improves the take up of our risk strategies by the profession.
Lexon’s risk program is internationally recognised
Lexon is sought after as a national and international consultant to other legal profession insurers, receiving regular requests for advice on how to structure risk programs.
We have also received both national and international recognition from leading industry organizations:
• Our Risk Counsel, David Durham, was awarded titles as the 2015 RMIA Risk Manager of the Year and the 2020 Lawyers Weekly Accounting and Management Consultancy Lawyer of the Year.
• Our risk team has been a finalist in several award programs during 2019, 2021 and 2022.
Whilst we understand that professional practice can never be guaranteed error free, our active partnership with the profession continues to improve risk awareness. Our workshops, risk tools and other initiatives have coincided with a marked decrease in the expected yearly number of insurance files by 39.7% since 2002/3. With a growing profession, this means the number of files opened per 1,000 solicitors has also decreased by over 73% in the same period!
The primary goal of our risk team is to reduce claims risk, and thereby the cost of insurance for the profession, but our risk message will only succeed if we have positive buy in from the profession. Given this, we actively seek the profession’s feedback.
The risk team provides the board with regular granular level insured feedback on the success of our risk program, and our survey results reflect a satisfaction rate for visited practices well in excess of 90%.
Insurance file numbers are at all time low frequency rates
Pursuant to the Queensland Law Society Indemnity Rule 2005 (Qld) QLS (rather than Lexon) has the power to levy the profession for its indemnity insurance. Lexon, in conjunction with actuarial consultants, assess the capital requirements of the scheme to ensure that it remains sustainable in the long term and then recommends a levy model which will deliver on that objective to QLS Council.
It was pleasing that for 2021/22 we were able to deliver:
• A return to the rates used in 2019/20, which are the lowest rates since the adoption of the GFI model in 2007/8 (save for the 2020/21 COVID rates which were subsidised by QLS).
• Maintenance of the 20% base levy discount for practices with at least 90% of their declared GFI as Criminal Law.
• No change in the claims loading rates from the prior year.
• The retention of the 15% discount off the base levy for practices that signed up to the Enhanced Management Review (“EMR”) program – with a minimum discount for small practices of $1,000 and a maximum discount of $40,000.
These low rates benefit every insured practice and are a result of the excellent claims performance of the scheme in recent times.
2021/22 saw an increase in the uptake of optional top up cover – both $3M excess $2M and $8M excess $2M – with a total of 320 practices covered during the year, a 13% increase on the prior year. This was not surprising given the substantial upwards pricing pressure on the solicitors’ top up insurance offerings of commercial insurers.
The overall limit of coverage provided in 2021/22 remained at $85 million. With global reinsurance claims experience deteriorating, and cyber claims increasing, the placement of this program remains one of the most challenging aspects of our operations.
Due to our ongoing relationships with key markets, the program quality and the effectiveness of our risk initiatives, we were able to place our 2021/22 program in full, materially below the industry average increase, and with full third party cyber cover.
The low rates offered for 2021/22 were a result of the continuing excellent claims performance
Investment returns for 2021/22 were extremely disappointing, flowing from weak equity markets and the continuing low interest rate environment.
Overall, we saw a full year investment loss of $6.5M, some $10.8M short of the budgeted result.
As at 30 June 2022, investments under management were $132.0 million.
Lexon undertook a detailed review of its investment strategy in March 2021. As a result, we moved to a simplified portfolio structure made up of two funds managed by QIC, being the Short Term Income Fund (STIF) and the Long Term Diversified Fund (LTDF).
The Investment Policy Statement (IPS) which governs the basis upon which investment decisions are made was updated to reflect those changes and continues to require conservative investment practices mirroring the APRA risk criteria for its benchmarks. Broadly speaking, Lexon now targets an allocation profile of 60% defensive (cash, fixed interest and the like) and 40% growth (including property and equities).
Lexon’s Audit and Investment Committee remains actively involved in reviewing and implementing financial policy to ensure Lexon continues to be managed responsibly.
Lexon’s diversified investment portfolio is managed with input received from experienced advisers including:
• QIC Limited.
• Finity Consulting Pty Ltd.
Lexon can seek additional funding as required to meet capital targets from QLS which manages the Law Claims Levy Fund (LCLF) which is continued pursuant to the Queensland Law Society Indemnity Rule 2005. The LCLF investment strategy is consistent with the Lexon strategy.
Volatile equity markets and low interest rates impacted investment performance
