SRA vs insurers as assigned risks pool governance proves sticking point

At a meeting between the ­regulator and insurers to be held next week (17 May), the Association of British ­Insurers (ABI) will lay out a raft of proposals aimed at stopping capacity exiting the market.

The central point up for discussion is how the assigned risks pool (ARP), the insurer of last resort for firms unable to gain cover on the open market, should be governed.
In March, following a ­consultation, the SRA said the ARP would remain open.

From 1 October, however, it will not be open to new firms, while those already in it will have to find ­alternative cover within 12 months rather than 24.

Mark Casady, schemes portfolio manager at ­insurer QBE, says the measure is merely a “sticking plaster” and will do nothing to help bring premiums down.

All insurers participating in the market contribute a proportion of premium ­collected to the ARP. Between 2000 and 2007 those costs stood at 3 per cent of premiums ­collected annually. In 2008 claims exposure shot up and that figure is likely to be between 16 per cent and 22 per cent, ­increasing further still for 2009.

On top of this the number of firms using the ARP has swelled to an all-time high of 241 as of February, ­compared with 28 at the 2007-08 renewal.

“If insurers find themselves paying too much into the ARP they’ll walk away,” one broker states. “It could mean some big rate hikes for all firms.”

The Law Society is ­supporting calls for a wider review of the single renewal date.

Law Society chief ­executive Des ­Hudson says: “A single renewal date is not of ­benefit to firms. We’ve publicly called on the SRA to ­abandon it.”

But he adds that “we do not think that abandoning the ARP altogether would be appropriate”.

Insurers do not want to move away from the model, but do want greater supervision by the SRA.

“Fraud and dishonesty aren’t good practice, you can’t underwrite that,” says ABI policy director Matthew Young. “What’s needed is greater enforcement and much more independent supervision. The SRA needs more resources.”

Hudson agrees. “Whatever you do or don’t do, the rules should be enforced,” he stresses. “If a firm doesn’t pay a premium instalment I’d come down on them and close them down for not paying. We’ve been urging the SRA to do that.”

The insurers say the costs of running the ARP should be paid for by the Law ­Society through a levy imposed on firms. Hudson says costs are a fundamental issue when it comes to the ARP.

“Part of the argument we’re looking at is what costs we’re trying to avoid,” he explains. “Is it the cost of running the ARP and staff, or is it the cost of the ­interventions?”
An intervention on a firm that fails to pay its premium can cost £250,000. As one lawyer says bluntly: ­”Sometimes it’s just ­cheaper to close these firms down.”

Insurers also argue that the SRA should approve a new system of staged ­premiums rather than the same standard cover for all firms (a firm with several hundred partners has the same standard of cover as a one-partner firm). This, they say, would introduce greater competition.

The Law Society agrees that there needs to be a ­discussion.

When contacted for its views on any potential changes, SRA chief executive Antony Townsend said in a statement: ­”Following extensive ­consultation, the SRA board has agreed ­limited changes to the ARP so as to preserve a system of sound financial protection for clients, while maintaining a ­sustainable competitive market for solicitors’ ­compulsory ­professional indemnity insurance.

“We’re also looking at ways the SRA and the Law Society can give better ­support to firms to avoid the risk of their entering the ARP, and at the scheme for solicitors’ professional indemnity insurance more generally.”

Casady at QBE says that, if the ­regulator continues to ignore the industry’s ­concerns, “the profession will inevitably continue to ­suffer significant shocks”.

The insurers’ demands

• Avoidance provision for fraud and dishonesty, non-payment of premium, misrepresentation and non-disclosure.
• Claims by commercial clients should be limited or excluded completely.
• Compulsory run-off should be replaced by a ­compensation fund, which would be liable for ­losses incurred by firms that were closed forcibly through regulatory action, did not secure ­appropriate ­insurance or whose policies were ­cancelled for ­breaches of policy terms.
• Given that the ARP is to remain, the costs of ­running these arrangements should be provided for by a levy imposed by the Law Society.
• The insertion of a financial credit rating for ­insurers into the qualifying insurers agreement.