Premium funding

Solicitors must use the accountancy model, says Tony Howe. Tony Howe is chair of Collegiate Insurance Brokers.

The 1 September renewal of SIF insurance is awaited with more interest than usual in view of the recent well-publicised difficulties it has experienced over the past year. If previous funding levels have been significantly inadequate, then firms can expect several years of high premiums to pay not only for the present but to provide for the past.

Those with good records, faced with a high level of subsidy for the less worthy, will question the continuation of a philosophy which requires all to indemnify every solicitor in a manner devoid of those considerations, which, if the risk were to be commercially underwritten, might well drive the less able out of practice.

Pressure for change has so far only given rise to modest amendments to the underwriting methodology and the scheme remains complex and unwieldy.

But it can be assumed that change will come. There are a number of models which could be adopted. Perhaps the most likely is the one used by the Institute of Chartered Accountants. Under its system, a number of insurers agree to underwrite scheme risks on an approved wording, providing a stable but competitive market. Accountants are obliged to purchase cover of three times their fees – a minimum of £100,000 and a maximum of £1m.

Those unable to get cover are placed in an assigned risks pool where their risks are shared proportionally by the approved insurers for a maximum of two years. The practice concerned undergoes a review by the Joint Monitoring Unit and then seeks to become insurable again. If it fails, it loses the right to practise. An important feature is the level of permitted deductible which, at £20,000 per partner, means that a practice with 25 partners is outside the compulsory requirements. This feature would no doubt be attractive to the large legal practices.

Although PI premiums are at an all-time low, there is every possibility that the demise of the SIF in its current form may be instrumental in creating a harder market. Underwriters may well cherry-pick and not everyone will attract bargain-basement deals.

So the intelligent practice manager will be considering whether now may be the time to consider a form of captive insurance, partly to reduce the subsidy being paid into the SIF, but also to set aside a store for the future. The captive would buy reinsurance when the market was favourable and run more risk when it was not. Or it might enter a long-term arrangement with a reinsurer on a finite risk basis, thus smoothing out the cost over time and possible partnership change.

The current Insurance Premium Tax rate of 4 per cent may make now the best time to consider starting a captive arrangement for firms which wish to fund their own deductible and perhaps to use the deductible buy-back premium quoted by SIF for that purpose.

Such a decision is the first step to an independent future. If it is also seen as the first step in firms voting with their feet, it may give a message to those in whose hands the future operation of the SIF is placed.