Law Soc would not gain from SIF bias
21 April 1998
Russell Wallman answers the charge that the Law Society's consultation paper on professional indemnity is weighted in favour of keeping a reformed mutual fund. Russell Wallman is director of policy at the Law Society.
Last week The Lawyer argued that the consultation process on the future of professional indemnity is in danger of being damaged by misleading information, aimed at influencing a particular outcome.
The Law Society agrees. However, the misinformation is not coming from this quarter.
Whether the profession and the Law Society decides to opt for a reformed mutual fund, go to the open commercial market, or find some other means of providing professional indemnity cover is the most vexing question that faces the profession at the moment.
The issue affects the whole profession, from the largest City firm to the sole practitioner. It serves no one's interest least of all that of the Law Society for the consultation process to be biased in any way.
So what is the true position? The Law Society Council was well aware that the comparative cost of the different options for the future would be a crucial consideration in most practitioners' minds (although it is not necessarily the only factor).
The council wanted to provide the best possible information about costs. Accordingly, the society commissioned two separate pieces of work from outside consultants.
An analysis of the likely overall cost to the profession of the three main options, assuming that the main terms concerning deductibles and so on were the same in each case, and that claims experience was also the same: a mutual fund, operating on the basis of risk-banding; a master policy; and a system of approved insurers.
Some illustrations of the contributions that individual firms might have to pay to a mutual, compared with the amounts the market would charge.
The assessment we received was that the overall cost of a mutual was likely to be around 30 per cent less than that of an approved insurers system, and around 15 per cent less than a master policy. That remains the best guide to the overall cost to the profession. It is consistent with the separate analysis, conducted by different independent consultants, for the Appleby Committee.
However, the fact that a mutual is likely to be cheaper for the profession as a whole, does not mean that it would be necessarily be cheaper for every firm in all market conditions.
Firms will have to make their own individual judgements about this, but we commissioned quotations for specimen firms in order to provide a guide.
The 58 specimen firms provide a mix of different sizes of firm, different types of work (in the sense of low risk, high risk, and mixed risk) and different claims records. More firms in the sample receive discounts than are subject to loading, because comparatively few firms in the higher gross fee bands attract claims loading.
We then gave our consultants the full claims record for each of the firms, and asked them to approach three insurers for each firm. We asked for quotations on terms which were as close as possible to those available from SIF, in order to facilitate comparison.
However, only one of the insurers was willing to quote on that basis and it is their figures which appear in the consultation paper. The full results (including the qualifications which the other insurers set) have been published separately.
As far as SIF's figures are concerned, it may not have been fully appreciated that the figures used in the comparison are those which would apply under risk-banding, as opposed to the current formula.
Risk-banding is designed to significantly reduce the level of cross-subsidy in the contribution arrangements. In particular, it is expected to benefit most firms with high gross fees, who have, up to now, paid substantially more to SIF than would be justified by the cost of their claims.
The conclusion must be that, for the profession as a whole, a mutual fund is almost certain to be significantly cheaper overall than either of the other options.
But a mutual also removes individual choice, at least so far as the basic level of cover is concerned. Perhaps the key questions for the consultation are:
Does the profession accept that the measures being put in hand by SIF, such as the introduction of risk-banding, will ensure that it operates on a properly commercial basis?
Does the profession think it worth giving up a choice of insurer, in order to achieve the overall cost saving of a mutual?
There is no point in pretending that the profession can have it both ways. We can maximise cheapness through a mutual, or choice through a system of approved insurers. We cannot do both at the same time.
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