Sector Insight Insurance
27 March 2000
Practising law in the insurance sector is akin to working on a conveyer belt - settle one piece of work and another appears at the beginning of the line. In an industry which is widely recognised as being one of the heaviest users of legal services, specifically for low cost litigation claims work, it is a fair assumption to make.
Keith Mahon, claims and services executive at Cornhill Insurance, says: "Because of the nature of the business we need lots of legal services. We are heavily influenced by the business areas and our biggest spend is on claims matters."
Certainly insurance companies themselves have done little to dispel this image of a "knock it down, sell it cheap" type of legal service.
Since the beginning of last year companies such as Axa, CGU and Cornhill have embarked on brutal reductions of their legal panels, with some insurers squeezing fee arrangements down to the bare minimum.
There are a number of reasons why insurers are taking extreme measures, such as Cornhill's recent drive to cut its panel from over 70 firms to just 15 (The Lawyer, 6 March). Cornhill had not reviewed its panel for five years and CGU's review was implemented after it completed the merger between Commercial Union and General Accident in 1998.
Geoffrey Timms, group head of legal at Legal & General, which is in the throes of conducting its annual panel review, acknowledges that the sector's image has been marked by the recent rash of reviews. Axa and Norwich Union are employing the services of Weightmans' former chief executive Martin Read to audit the costs of handling claims work.
Firms fear that if they do not pass the audit, both insurers will make good on their promise to bring claims work back in-house.
Timms says: "We do not want everyone to be on a knife edge every year, we have got to be rational about this. It will get to the stage where the wrong firms are doing the work and the quality of the firms will go down."
Like a number of other companies such as Iron Trades and United Friendly, Legal & General uses a questionnaire method to decide which firms it will retain. Timms says: "We have a questionnaire that we send out internally to people who use firms asking standard questions and grading different areas such as speed of response. We then put it on a spreadsheet to build up a profile, which we then review."
The company then sends out another set of questions to its firms - which include Berrymans Lace Mawer, Slaughter and May and Berwin Leighton - to assess what areas Legal & General can improve on, for example whether it pays its bill on time. "Most firms are pretty honest," Timms says, laughing.
Timms is one of many decision-makers who are averse to the idea of using the beauty parade method to select legal advisers. Paul Gilbert, head of legal and group company secretary at United Friendly, says: "I think it is a little bit pretentious for people to sit there like Little Lord Fauntleroys and choose a firm. I do not like beauty parades, they are artificial. It is not the best way of establishing the credibility of a firm."
Nick Rochez, insurance partner at US firm Leboeuf Lamb Greene & MacRae, says: "In the litigation business you already need to have a fair amount of knowledge of the company so there is no need for a beauty parade."
Even for more specialised insurance work, which Rochez describes as "low volume, high cost" - including professional indemnity, engineering and construction claims - insurers are opposed to this method of selection.
Adrian Baskerville, head of legal services in the general business unit at Zurich Financial Services, which owns Eagle Star, says: "We have not done a beauty parade for any piece of work. In terms of distributing work, we work out what is required and what the principles are."
Baskerville adds that since specialist insurance work is tendered to individuals rather than firms, he rarely entertains the idea of using a beauty parade as part of the selection process. "We look at our own knowledge and experience, we look at the Chambers directory and we partially choose firms by reading The Lawyer," he says.
Paul Taylor, national senior partner at Berrymans, says: "A major area of expansion is in the specialist field but the difference in this area is that work goes to one or two well-known individuals."
Those well-known lawyers include Rochez, Herbert Smith insurance partner David Reston and Michael Payton, senior partner at Clyde & Co.
Cornhill, one of the largest purveyors of bulk litigation work in the sector is disdainful of using either a beauty parade or questionnaires.
Mahon says: "We are fortunate enough not to be like CGU, we do not need to fill out questionnaires, we know our firms. But we needed to properly analyse the process [of panel selection]."
Cornhill, is still in the process of informing its firms whether they have been retained on the panel. But it has already confirmed that Berrymans, Eversheds and Beachcroft Wansbroughs will continue to provide litigation advice.
Mahon adds: "We knew we had to get the numbers down and we would not get there from cold tendering."
While the company is recognised as undergoing one of the heaviest rationalisations of recent months, Mahon says that it is taking a more pragmatic approach to selecting its firms. "We start by looking at our own external experience and seeing who the people are who understand our business," he says.
He says it was important that Cornhill spoke to each of the firms to ensure that they knew why they had or had not been retained.
Once the firms had initially been reviewed internally on such things as value for money and if the lawyers sufficiently understood Cornhill's business, Mahon began looking at geographical coverage.
Even though Cornhill Insurance has taken a number of smaller regional firms like James Chapman & Co and Jacksons off its panel, Mahon says that he does rate highly the coverage and depth of knowledge that local firms can offer.
Ashton West, general manager of claims at Iron Trades, agrees: "There are huge benefits to using regional firms. They have a local knowledge and are cheaper."
But he adds: "While that is sometimes a factor, it is not the first issue."
Insurers such as Axa and Norwich Union have taken a hard-line approach to their review processes by sending external auditors to examine cost and services.
When Iron Trades cut its 40-strong panel to 12 in April last year, it instructed Berrymans and Jacksons to help with the review process. West says: "We chose both a regional and national firm to assist with the process. We are not arrogant enough to do things without others' help."
Iron Trades is venturing down the same route as Axa and Norwich Union by introducing auditing for the first time to keep tabs on service and standards of advice. West says: "They [outside advisers] have to have the ability to understand the client's needs."
While firms dealing in claims litigation continue to face the prospect of gruelling panel reviews, the insurance sector's overall structure has been consolidating over the past four years.
The most recent example of an ever-decreasing sector is the proposed merger between Norwich Union and CGU, which shareholders will vote on at the end of this month.
Gilbert, whose own company United Friendly is currently being taken over by Royal London Mutual Assurance Society for £1.5bn, says that a long-awaited review will now be put on hold pending the outcome of the acquisition.
United Friendly currently uses Slaughter and May, Dibb Lupton Alsop, Addleshaw Booth & Co and Beachcroft Wansbroughs. But Gilbert says: "If a company's destiny is a little uncertain then it is disingenuous to set up a panel."
While it is still too early to determine what will happen to the company, Gilbert says that if he does review the firms used he "will go to the firms with a shopping list of what legal products we want to buy".
As the sector consolidates and firms face more rigorous tests in the attempt to be retained by the major insurers, lawyers are being forced to change tack to cope with an industry that seems to be constantly morphing.
West says: "Changes in the sector will continue but it is an opportunity for lawyers to change what they are offering. A number of lawyers are moving to pre-litigation work for example."
Gilbert adds: "People describe insurance as the old world economy, it feels a bit alienated from what firms would call sexy. But it is a fascinating area to be in."
Consolidation of the Market
CGU and Norwich Union agree to a £19bn merger subject to shareholder approval and scheduled for 31 March.
Royal London Mutual Assurance Society announces plans to purchase United Assurance Group for £1.5bn.
December 199Iron Trades acquired by Australian-based QBE International Insurance for £175m.
April 199Axa's UK subsidiary Sun Life and Provincial Holdings buys Guardian Royal Exchange for £3.45bn.
Norwich Union acquires London & Edinburgh Insurance Group for £315m to create the UK's third largest general insurer.
Commercial Union and General Accident announce £15bn merger, creating CGU.
November 199French insurer Union des Assurances de Paris (UAP) acquired by Axa for £12.5bn. UK subsidiaries Axa Insurance and UAP Provincial merge to form Axa Insurance.
Royal Insurance and Sun Alliance link up in a deal worth £3.66bn to form Royal & SunAlliance.
The last year in insurance
Axa Insurance and Norwich Union plan to bring claims litigation work in-house unless firms become cost effective.
Cornhill Insurance reveals plans to cut legal advisers from over 70 firms to 15. Smaller niche firms are knocked out of the fray in favour of practices with regional coverage.
Royal & SunAlliance reveals panel line-up which includes Berrymans Lace Mawer, Davies Arnold Cooper and Vizards Staples Bannisters.
Legal & General announces 11-strong panel review.
Axa suspends Berrymans' London office and Kennedys' Brentwood branch after they failed an audit conducted by former Weightmans chief executive Martin Read.
Axa announces plans to reduce panel of over 30 firms pending an audit.
October 199Royal & SunAlliance introduce plans to cut commercial litigation firms.
August 199CGU culls property management panel from 10 advisers to three.
Cornhill Insurance unveils intention to slash its panel. The bidding process
begins in December.
June 199Iron Trades drops 10 firms from its panel, retaining just 12 advisers.
May 199CGU accused of paying its firms below the going rate for litigation claims work while demanding a 'free' lawyer to be seconded in-house.
Eagle Star begins to knock firms off its panel before the re-tendering process
April 199CGU announces interim insurance panel, reducing numbers from 100 to 18 firms.
Iron Trades appoints Berrymans and Jacksons to assist in its panel-cutting exercise.
March 199CGU sends firms pro forma spreadsheet demanding financial information, sparking fears of a wide scale review.