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19 December 2013
It's a blood bath out there," says Andy Doré, regional manager at Lloyd's syndicate RE Brown & Others, of the process of taking professional indemnity to the open market.
A poor take-up, wildly fluctuating quotations, cherry-picking insurers, increasingly expensive premiums - all are complaints that have been widely voiced since the end of the Solicitors Indemnity Fund (SIF).
But the biggest gripe is the lack of choice on offer. "There are a limited number of insurers and the choice is further limited by the sector that insurers want to concentrate on," says Russell Levy, a partner at Leigh Day & Co.
"The Law Society has agreed a policy wording with all [qualifying] insurers that is so broad that solicitors are covered for any eventuality and there is no possibility of [the insurers] adding any bells and whistles," says Michael Rendell, director of brokers PYV. "Basically, you are left with a choice of insurer and a choice of premium."
Michael Churchman, underwriter at insurers Cox Syndicate Management says: "Submissions are going to each broker in the market. Some offer the same quotes and others, if they want the market that much, may be prepared to beat it. You can keep tweaking the numbers but it is very hard to change the product."
According to Eric Franz, head of financial liability at CGU Insurance: "The differentiating factor is how the clients are handled - their relationship with the brokers."
"Firm's decisions will be cost-driven at this stage. They are not looking for a good business relationship with their insurer," argues PYV's Rendell.
But Trevor Moss, director of Nelson Hurst Professional Indemnity, highlights the one area where a select few really have been able to differentiate themselves - service (see box).
Moss says: "Cost is important and is being driven by the profession. But there is also a servicing issue. Insurers are under resourced but are buying into the claims service to improve what they can offer."
With most of the top City firms already having safely secured cover, the insurers are battling it out for market share in the small to mid-size firms with between 10 and 25 partners.
"Firms with 10 to 25 partners and good claims records are the cream of the crop. Syndicates are trying to cherry-pick and many have already reached their quota," says Steve Roberts, chief executive officer at Zurich Professional.
"What has begun to happen in the last few days, because of the competition for smaller firms, is oversaturation of the market," says Churchman. And with the vast majority of insurers unable to differentiate their products - particularly for the first £1m of cover - it is essentially a straight race to deliver the lowest quote.
Moss says: "Everyone is scrabbling and no one is getting the business. It's too early to say who will get the market."
The law firms themselves have hardly been helping matters by flooding the market with applications. The result is that insurers are receiving multiple submissions from firms which is causing further delay to an already deadlocked process.
But while many firms have made submissions, by the end of last week most brokers still reported an astonishingly low take-up of between 5-10 per cent.
"Based on what I've seen I don't doubt that less than 10 per cent are signed up. The top 100 firms tend to be more complex and so many are under control but the mass market is not under control. We are working more than 12 hours a day seven days a week," says Roberts.
The danger for solicitors using cost as the sole criteria is that they risk losing out altogether. The brokers are already working ridiculous hours and many, such as FirstCity Professional Indemnity, are saying that from today (Monday) their doors will be closed to all new enquiries to enable them to deal with existing submissions.
"If all firms want is the lowest price then it might work, but it might not. Companies may shut their doors. We have almost got there and Tindall Riley [underwriters] will have shut their doors by Monday," says Churchman. The spectre of up to 90 per cent of solicitor's firms facing punitive premiums at a minimum of 25 per cent of fee income - compared to an average of 6 per cent on the open market - in the Assigned Risks Pool (ARP) looms.
"Firms not signing up is a big problem and the pool [ARP] may well be too big to handle," says Michael Kent, managing director of Saturn Professional Risks for MMA Insurance.
However, most commentators argue this will drop significantly before the 31 August deadline and that only 15 to 20 per cent will end up in the ARP.
Kelvin Curran, director of brokers FirstCity, says one section of the profession facing real difficulties securing cover is sole practitioners, especially where they have no other staff so there is no back-up or support.
"One thing that has emerged is that there are a number of small practices out there with very small fees and very few underwriters are prepared to issue a policy because there is not enough premium, not because they are not good practices but just because they are not financially viable for the insurer. For example, some contributions to SIF were only £25 last year," he says.
Certainly, there is very little competition among insurers at the bottom end of the market, while others are making advised choices about the type of practice they will choose to cover.
"A lot of insurers are cherry-picking. For example, saying they will only offer cover to firms that practise exclusively in matrimonial, trust and probate who face very few claims," says Rendell. "The two worst [practice areas] are personal injury and conveyancing because they produce all the claims," he adds. Curran agrees: "The historic records of solicitors practising in these two fields has been pretty horrendous and consequently have been identified as high risk."
As a result, many specialist firms have been quoted wildly different premiums. "There is variation in quotes to the point that one can be 150 per cent more in terms of price," says Moss.
Curran cites the example of one nine-partner practice with a fee income of £2.6m. The cheapest quote for £1m of cover, subject to an excess of £25,000 on the first three claims, was a premium of £50,000 - a saving of £15,000 on last year's SIF contribution - while the most expensive was £129,500.
However, while John Webber, senior partner of leading personal injury firm Russell Jones & Walker, agrees that premiums for specialist claimant personal injury firms will increase, he fuels the uncertainty surrounding this whole issue by offering a different perspective on the situation for conveyancing practices.
"There is a perceived irony - the rationale for the change was that a large number of claims for small conveyancing firms were misusing the funds. But what has happened is that claims in conveyancing areas have got a lot better and now big City firms are perceived to be a bigger risk. Premiums for big City firms have increased while they have been reduced in conveyancing areas," he says.
Despite the mass of uncertainty and wildly conflicting evidence, most commentators maintain that professional indemnity insurance will ultimately be cheaper on the open market - PYV surveyed almost 200 firms and found that only 2 per cent of those that had signed up are facing higher premiums. The message for the rest is clear - sort it now.
At your service
Although cost is the driving force behind the market, most firms also want a standard of service comparable to the expertise offered under SIF. But with insurers having little experience of solicitors' professional indemnity until now, this is hard to guarantee. Alexander Forbes, Aon Claims Solutions (ACS) and Ace Underwriting Agency have taken advantage of this gap in the market and have set up joint ventures with law firms which can provide immediate and qualified advice.
Alexander Forbes has created a claims service in partnership with law firm Kennedys. According to Martin Ellis, associate director at Alexander Forbes, insurance companies say they want expert assistance on claims handling and proactive advice on risk-management.
Ellis decided the solution was to set up an infrastructure where clients could get immediate access to legal personnel and to underwriters.
For insurers that use the scheme, Alexander Forbes assesses the risk and a group of lawyers at Kennedys spend five days a week dealing with queries and providing advice to the profession. Nick Kennedy, senior partner at Kennedys, says that solicitors prefer to confer with other solicitors, as opposed to insurers, because they understand the profession.
The system is technology driven and has a web-based reporting system so that insurers, brokers and clients can all access claims details on the internet. Solicitors can even send notifications by email.
Ace Underwriting Agency has entered into a similar joint venture with Hammond Suddards Edge. Again, the law firm will handle, assess and advise on all of the agency's notifications. The difference is that Hammonds will advise a panel of experts rather than do all the work itself.
The panel of specialists include Beachcroft Wansbroughs, Bond Pearce, CMS Cameron McKenna, Freethcartwright, Hammonds, Kennedys, and Mills & Reeve.
According to Stuart Wright, underwriter at Ace Underwriting Agencies, the joint venture speeds up the service. "Hammonds don't just give advice, they give immediate advice," he says. Wright says that his intention is to cut the cost of handling claims. "SIF had problems which came from the cost of handling claims rather than from the cost of the claim itself. This method is more efficient and it cuts down on bureaucracy."
Aon Claims Solutions has opted to work with more than one law firm, setting up its own in-house legal department which will handle the claims. The team will be made up of lawyers on secondment from a panel of law firms - Barlow Lyde & Gilbert, Beachcroft Wansbroughs, CMS Cameron McKenna, Davies Arnold Cooper, Eversheds, Reynolds Porter Chamberlain and Rowe & Maw.
According to Martin Thomas, ACS managing director, having an in-house team is advantageous. "The perception of one firm is not necessarily fair and independent but we hope to be able to blend old blood with some new."
Three of the seven panel firms were previously on the SIF panel and Thomas is pleased to have some continuity from the past.
"We have lawyers sitting next to risk claim specialists who sit next to insurers - so we have all the expertise in one venture," he says.