Pressure on the Solicitors Regulation Authority (SRA) to overhaul the way the solicitors’ professional indemnity (PI) insurance market is governed has been immense in the build-up to the 1 October renewal date.
The regulator has been accused of failing to stem rate increases because it failed to reform the sector. But with new capacity arriving in the market, was the watchdog right to stand firm?
There is no doubt this years’ PI renewal will be tougher than ever.
The decision by the Irish Financial Regulator to put Irish insurer Quinn into administration in March set off alarm bells throughout the solicitors’ PI sector. The insurer underwrote policies for 2,900 small firms. In the insurance world Quinn was known for picking up the firms that could not get cover elsewhere.
Quinn, which had a reputation for undercutting rivals, helped keep the number of firms in the assigned risks pool (ARP) – the insurer of last resort for the profession – proportionate to the sector.
When it left the market there were concerns that the number of ARP firms could rocket. The insurance market has been warning about the negative impact the ARP has on insurance rates for some time.
All insurers in the PI sector make a contribution to the ARP, meaning that the market always covers firms that cannot get policies elsewhere. The more firms there are in the ARP, the higher financial contributions insurers must make.
Davies Arnold Cooper partner Edward Coulsen says insurers have paid £50m into the ARP since its creation in 2000.
Steve Holland, executive director of the professions and risk solutions practice at insurance broker Lockton, says: “The number of firms in the ARP looks set to rise, possibly to 500 in 2010.
“If this prediction is accurate the ARP will account for 10-15 per cent of the total premium and, as in the old Solicitors’ Indemnity Fund [SIF] days, the good firms will be forced to subsidise the poor performers.”
The Association of British Insurers (ABI) led the call for market reform.
“Fraud and dishonesty aren’t good practice, you can’t underwrite that,” ABI policy director Matthew Young told The Lawyer earlier this year (10 May). “What’s needed is greater enforcement and much more independent supervision. The SRA needs more resources.”
The ABI called on the SRA to introduce a tougher regime to crack down on ARP firms that do not pay their premiums.
Earlier this month the SRA revealed that it had visited 88 ARP firms since July and, during that period, the number that had paid their premiums had risen from 71 to 77.
Insurance brokers claim this does not go far enough. PYV Legal managing director Nick Pointon comments: “The raft of proposals put forward by the ABI and the forum of insurers participating in the solicitors’ PI sector are not designed to encourage new capacity in the sector. None of these suggestions have been taken up.”
That said, he adds: “I do have some sympathy for the Law Society and the SRA.”
Pointon speaks for many market insiders when he says the regulator and trade body are having to operate in an environment where the needs of consumers come first.
Therefore, lawyers, unlike in any other profession, must have gold-plated cover while the policy terms offered to a high street solicitor are identical to those offered to a City litigator.
“There are always calls for change, warnings that firms won’t get their insurance and forecasts of massive premium hikes,” says one lawyer. “It’s usually just brokers or underwriters trying to drum up business.”
Nevertheless, the warnings appeared to bear fruit recently when it emerged that a series of big insurers planned to move away from the bottom of the market.
QBE, which controls 15 per cent of the sector, said it would be concentrating on renewals rather than attracting new business, and that there was limited, if any, appetite for smaller firms.
Meanwhile, Zurich, which has 13 per cent of the market, said that in order to reduce its exposure to the ARP it would cut significantly the amount of new business it takes on. Chartis, formerly AIG, which controls 15 per cent of the sector, also revealed that its business focus would be on renewals, with little appetite for firms with fewer than 10 partners. Hiscox followed suit.
With so many exiting the bottom end of the market the outlook seemed bleak for all firms, with some predicting the number falling into the ARP could reach more than 1,000.
Yet still the SRA did not budge: the mechanisms of the ARP would alter slightly (such as firms only being allowed to participate for one year rather than two), but there would be no dramatic change.
Then Travelers, the second-largest PI insurer, signed a deal with broker Prime Professions, which would see it pick up the firms that the broker once referred to Quinn.
The insurer said it would look at the book of business on a case-by-case basis and that rates would be higher, but at least it was a lifeline.
Denmark-based underwriter Alpha Insurance said it would issue policies for firms with between one and 25 partners through Giles Insurance Brokers and St Giles Legal & Professional Risks.
Meanwhile, Ukraine-based Lemma Europe increased its capacity from £4m to £20m and Vision Underwriting, a wholly owned subsidiary of Liberty Mutual Insurance, says it will enter the market for firms with between one and five partners.
The SRA is consulting widely on changes to the solicitors’ PI market ahead of the 2011 renewal date. It resisted pressure to make knee-jerk changes when Quinn was put into administration and has been fortunate that new players have entered the market.
Historically, the market has favoured firms paying low rates for first-class cover terms. So the SRA was right to hold steady – but it cannot resist change forever.