Better the devil you know

If insurance companies are happy to offer extended coverage, why not for the first £1m in coverage currently offered by SIF?

A left-wing wit once observed that the reason Margaret Thatcher won so many elections was because “at least you always knew where you were with her”.

The Solicitors Indemnity Fund's (SIF) survival beyond the autumn may depend on a similar form of logic. Premiums may be considered high (in some cases this year over 100 per cent higher than last year) and firms may have to pay an additional 30 per cent to fund the £450m shortfall – but what would happen if the fund were to suddenly vanish?

At the Law Society's roadshows on the future of professional indemnity, SIF's managing director Elizabeth Mullins has skilfully played on the profession's fears of the open market. Do not be seduced by brokers' blase promises of cheaper premiums, she says. What happens when the market hardens in two years' time?

True enough, objective facts about “approved insurance” are hard to come by. In March, Sedgewick Risk Consulting approached three underwriters on behalf of the Law Society – Admiral, American Insurance Group (AIG) and Royal & Sun Alliance – to obtain quotes for 58 specimen firms. One of the insurers, believed to be AIG, quoted premiums higher than SIF's in nearly 70 per cent of cases.

AIG declined to comment on this. According to the Law Society, the other two underwriters “declined” to quote premiums for any of the firms on the grounds they may be offering a different level of deductible to SIF.

The exercise suggested that the open market was expensive and uninterested in insuring solicitors. However, The Lawyer understands that the two companies who “declined” merely said they required more information and were “furious” when the results were published.

Last month, another study by brokers Nelson Hurst & Marsh and Robert Flemings on behalf of the November Group which opposes SIF, reached an opposite conclusion to Sedgewick. They approached one Lloyd's underwriter to obtain quotes for over 200 firms. Its quotes were cheaper than SIF's 1997 bills in over 70 per cent of cases. They also canvassed opinions on insuring solicitors from nine Lloyd's underwriters and six insurance companies, concluding that underwriters were eager to replace SIF and that no “doors are shut” to any part of Nelson Hurst's suggested approved insurers scheme.

Of course, the insurance industry is big enough to sustain many different opinions. There are clearly a large number of underwriters willing to insure solicitors – many already do. About £100m of premiums are paid out to the open market by law firms for top-up insurance of up to £200m above SIF's £1m cover, and for in-fill insurance, covering firms against having to pay out the deductible.

So if insurance companies are happy to offer extended coverage, why not for the first £1m in coverage currently offered by SIF? “Why not indeed?” answer the insurance companies.

Bob Ripley of Royal & Sun Alliance says: “I would have thought there will be a sizeable interest for moving into that market.” Colin Buchanan at AIG agrees, saying: “We will consider every opportunity as it arises.”

But not everyone is convinced. Tracey Ambrose at insurers Chubb says: “I can't see us looking at that market. It already has a £450m shortfall. I can't see how we could make money unless we cherry-picked the best practices.”

Buchanan says: “Looking at the deficit, will there be a charge into the market by underwriters inexperienced in professional indemnity?” Rob Gillies at the Lloyd's-based Non-Marine Association says about half the 30-40 Lloyd's syndicates currently writing top-up insurance do not want to enter the primary insurance market.

So what do underwriters think insurance on the open market would cost firms? Surprisingly perhaps, the consensus is that, overall it will cost more than SIF. Reg Brown of RE Brown & Others says: “Solicitors as a profession are collectively better off where they are. Insurers have their own cost and profit margin as well as the brokers fee – £200m could easily become £250m.” Ambrose asks: “How can the market possibly be cheaper than a mutual fund?”

Gillies says that “cut throat” competition among syndicates could make approved insurance cheap for the first few years, but after a “bloodbath at the beginning”, premiums will rise. He says firms are unlikely to negotiate insurance separately but will buy insurance collectively, either through local law societies or organisations like the Solicitors Property Group. This will hand purchasing power to the brokers who “might screw down the underwriters”.

The market is equally candid about the fate of firms with poor claims records. Gillies says that 30 per cent of firms from across the spectrum will have a problem buying insurance. Reg Brown says it is hard to make firm predictions as only SIF has access to individual firm's details but adds: “The high street firms will probably be the biggest losers as it appears they are the ones causing the most concern.”

More positively, the insurers almost universally accept that they will have to fund an assigned risk pool. In return for a share of the good risks, underwriters will have to insure a proportion of the firms with the worst claims records – albeit for significantly hiked premiums. Such firms would have a period of grace, probably two years, to get their risk management in order.

Of course there will be winners. Gillies says firms with good records have nothing to fear. He adds that between the major firms, which insure massively on the open market already and small firms, paying smaller premiums, there is a “middle tranche” of firms which could benefit massively as underwriters compete for their business.

Many insurers say that a big change would be the open market's insistence that firms notify of “circumstances” which could lead to a claim rather than, as with SIF, only actual claims.

No-one in the insurance industry is counting chickens. In stark contrast to the opprobrium heaped on SIF by sections of the legal profession, insurers regard SIF with respect. One underwriter says: “SIF's claims handling procedure, for example, is simply phenomenal.”

And no-one is underestimating the Law Society's desire to stand by its creation. When it is suggested to Reg Brown that SIF will lose the argument this autumn he chuckles. “We're waiting with baited breath. SIF be abolished? Don't you believe it.”

So what do the law firms think?

Law Group UK has informally sounded out its 80-plus members in its medium-sized firm network on behalf of The Lawyer, regarding whether they want to use outside insurers.

Though differing opinions were voiced on whether SIF should remain in its present format, or whether the cover it provides should be put out into the open market for competitive tendering, the majority of practices were of the opinion that an open market solution was the more attractive option.

Of those favouring SIF, most were of the opinion that the recent introduction of risk banding had vastly improved the service and reduced feeling that a change is necessary. Some firms generally felt that SIF had got its act together and was acting in the interests of the profession.

Recent changes seem to have reassured those firms concerned about the inefficiency and standards of other practices, by ensuring that any ineptitude is paid for by the negligent party as opposed to those firms which are operating effectively.

In the main, however, most were attracted to the open/free market solution which they saw as offering a major opportunity to reduce the cost of the cover.

Being part of a network whose combined purchasing power could exercise enormous purchasing leverage on the open insurance market made it particularly interesting.

In particular, some firms were hostile to the “loading” of premiums which has seen those firms which are operating successfully in high premium areas such as conveyancing stung with higher costs which, they believe, is compensating for shortfalls in the performance of the system elsewhere.

A significant contributory factor here was the ill-feeling caused by the mismanagement of the fund which has led to the.recent large shortfall.

Many were of the opinion that any system ought to be more equitable and that the free market option would unleash the benefits of open, competitive tendering and fiscal prudence which would be vastly beneficial overall. If other sectors could gain from the power of market forces then why not the legal profession?