Scrapping SIF and moving from mutuality to market has proved a blessing for many a law firm – especially those which halved their premiums in one fell swoop – but it is a double blessing for professional indemnity (PI) firms, which will have an eye for a new territory.
For years SIF panel firms had this lucrative sector sewn-up, but not any more. Hammond Suddards Edge's senior insurance partner Edward Coulson says: “I think you're going to see some pretty dramatic long-term changes in the market.”
Many of the 34 approved insurers which have claimed a stake in solicitors' PI work have gravitated towards the SIF firms for their claims handling. But Coulson believes that as the insurers “begin to get their feet under the table” they will soon look further than the obvious choices.
In the meantime, those firms with strong PI practices which were always excluded from the SIF party – such as Hammonds, CMS Cameron McKenna and Kennedys – will be waiting patiently in the wings. All three firms have been quick off the mark to make their presence felt in the new market.
Hammonds has been working with Ace Insurance, establishing its claims handling service the Solicitors Practice Protection, as well as landing places on panels for both Axa and AIG Europe. Camerons is on the panels of three insurers in this new sector, including QBE, and Kennedys has joined up with broker Alexander Forbes to run AF Solicitors Claims Service.
But the former SIF firms seem undaunted by this influx of new blood into the market. Reynolds Porter Chamberlain insurance partner Caroline Byram takes issue with the prognosis that their market share will decrease as a result of new entrants. “I don't really see why it should,” she says. “Of course, it has produced an opportunity for other solicitors out there in the market who have the contacts and in that sense it is a threat, but equally there is everything to be won.”
Being on the SIF panel was great work if you could get it. The fund spent in the region of £75m on its 20 law firms last year. Camerons insurance partner Peter Maguire says: “It was a bit of a closed shop then, but now it's an open market. From our perspective it's quite simple, it's all work we didn't have before.”
However, Maguire believes that the pot of money will shrink dramatically in the new PI market. “There's a hell of a lot more competition and people like us and other good, competent firms are coming in over the horizon,” he says.
Sarah Clover, an insurance partner at Barlow Lyde & Gilbert, offers a different reason. “What's been happening so far is that one of the first priorities of the new insurers that have been coming into the market has been to see what they could do to reduce the level of fees going to outside firms.”
Insurers have been tempted into the sector by the chance of getting a share of the whopping £250m premium income extracted through the old mutual fund. As Clover says, the income from SIF was more than double the income from the rest of the sector.
But insurers have been less than enamoured by the £75m spend on lawyers' fees and are looking at more economical ways of organising their legal work. St Paul is the joint venture partner of the Law Society and is required to offer insurance to all sectors of the solicitors' market for public policy reasons. The insurer has the largest market share for solicitors' PI work, standing at 24 per cent.
According to St Paul's communications manager Richard Gerrard, the insurer is not running a fixed panel, instead choosing to have 'preferred suppliers' featuring all of the SIF firms. The insurer's philosophy is to avoid litigation where possible and keep work in-house. Gerrard says: “We employ external legal advisers as appropriate but we'll retain conduct and control of the matter throughout.” So far St Paul employs 13 claims handlers in-house.
It is a similar story at Zurich, which has the third largest market share, in the region of 13 per cent. Zurich claims manager Sarah Venus says: “The real change is that there's less work out there for the firms. Across the board I'm hearing that the panel firms are getting less instructions.”
Zurich has six claims handlers and a panel of 10 firms, nine of which are SIF firms. And according to Venus, the in-house team “will grow to meet the needs that we have”. She says: “Once we hear of the matter we can get stuck in and try and resolve it one way or another before it goes to litigation. Because of this the number of instructions will be less than it was in the past and that effects the market.”
Byram says: “In some ways keeping work in-house is more of a threat than other firms being involved. Other firms are something that we have dealt with in other areas of our practice for years.” Reynolds Porter, Barlow Lyde and the other SIF firms are keeping themselves busy with their run-off work from the mutual fund, which could go on for some years.
So far it has been a slow start for any firm specialising in solicitors' PI. According to Richard Gerrard, only a handful of claims have been pursued through the courts. St Paul and Zurich both report a dramatic drop in claims for a number of reasons. Prior to last year's 1 September deadline, solicitors were urged by insurers and brokers to notify the fund of circumstances which might give rise to a claim. The response was so great that the SIF fax machine broke down under the pressure, but the effect was, as one PI lawyer puts it, to “purge the system”. There has also been a general drop in litigation as a result of the Woolf reforms. In particular, a PI pre-action protocol will be introduced next month which has already made an impact on claims.
With the first anniversary of the open market regime more than two months away, it is very early days for this new market. So far, competition between the insurers has been fierce and some players are already predicting a shakedown.
Maguire says: “It's been cut-throat pricing across the board and the premium levels have been set too low because it's not an inherently profitable part of the business.” The £250m premium income under SIF has been slashed to £148m on the open market. But many expect a considerable narrowing of the gap as the insurers redo their sums.
Jonathan Davies, senior underwriter at St Paul, predicts that if rates continue at this level, underwriters would be forced out of the market.
Gerrard says: “It looks as though some insurers have come in with prices that were designed to achieve a market share but they are not sustainable.” He predicts that some time this year or early next year other insurers will be forced to hike their premiums, causing dissatisfaction and instability in the market.
It remains to be seen which insurers have got it right, says Coulson. He predicts some consolidation in the market during the next few years. Hammonds' approach has not been to join the panels of insurers with the largest market shares but to form partnerships with those which it believes are most likely to be around in the long-term.
As a self-declared critic of SIF, Coulson welcomes his firm's drop in premium (not quite 40 per cent) on the open market and as a PI lawyer he relishes the potential for work.
Hammonds is clearly in this sector for the duration. “You are looking at a long-tail risk in this sector,” says Coulson. “It takes a long time for this market to mature and insurers are looking for people that are going to stick with them long-term.”
The St Paul
Barlow Lyde & Gilbert, Beachcroft Wansbroughs, Bond Pearce, Browne Jacobson, Cripps Harries Hall, Crutes, Henmans, James Chapman & Co, Lovells, Mills & Reeve, Morgan Cole, Pinsent Curtis Biddle, Reynolds Porter Chamberlain and Weightmans.
American International Group
Royal & SunAlliance