Ireland’s High Court will today (12 April) decide the fate of insurer Quinn Group and whether to confirm its administration formally.
The decision will have major ramifications for the 2,911 law firms across England and Wales that place their solicitors’ professional indemnity (PI) with Quinn. Indeed, Quinn’s exit from the sector could be the catalyst for some serious changes in the profession.
The High Court appointed Paul McCann and Michael McAteer of Grant Thornton as joint provisional administrators of the insurer last month (31 March) following an ex parte application by the Central Bank, acting through the Irish Financial Regulator.
This came after the regulator raised “serious concerns” about the fact that the insurer had ”significantly breached” its insolvency ratios and had failed to deliver a financial plan aimed at restoring its financial health.
In England and Wales Quinn insures 2,911 firms, the equivalent of £24.5m of the gross written premiums market. These are mainly firms with fewer than 10 partners, with approximately 90 per cent of them in the one-to three-partner bracket.
“The reason firms went to Quinn was because they couldn’t get cover anywhere else,” one broker says. “They’re cheap but not rated [by a rating agency], and the bigger brokers wouldn’t work with them. But it was a viable alternative to the ARP [assigned risks pool].”
After the regulator called in the provisional administrators, the insurer was closed to new business in the UK, sending shockwaves across the legal profession. For the insurers, however, it came as no big surprise.
“They were never rated here,” says one insurance lawyer. “There was a lot of unhappiness about how they entered the market – they just came in and undercut everyone.”
Mark Casady, schemes portfolio manager at insurer QBE, adds: “About 15 or 18 months ago the insurers identified a need to impose a financial credit check with the PI market – that should include insurers having a financial credit rating.”
PI insurers (PIIs) have long warned of the dangers of endorsing an unapproved regulator. The Royal Institute of Chartered Surveyors (RICS) removed the Irish insurer from its preferred PII list in 2008 when it refused to be rated. The Law Society of England and Wales faced calls to follow suit, but failed to do so.
“From the Law Society’s perspective it would be difficult to drop an insurer like this because of the book of business it writes,” explains the insurance lawyer. “If you took them out of the market you’d end up with several hundred smaller firms being unable to get insurance.”
Plexus Law senior partner Tim Oliver comments: “I wonder whether there’ll be some backlash against them [the Law Society] or the SRA [Solicitor Regulation Authority] now. Someone from the representing bodies has looked at this and given their approval.”
Casady believes the backlash has already begun. “This situation could’ve been avoided if they were taken off the approved list – RICS did it,” he says. “It’s not just about Quinn, once again it’s the Law Society and the SRA.”
This criticism will be compounded when firms come to renew their cover in October and find rates have soared because capacity in the sector has shrunk. Inevitably this will result in more firms being forced to use the ARP, the insurer of last resort. Those participating pay premiums of up to 30 per cent of fee income to get cover, with claims being paid by the insurers participating in the market.
With the claims ratio beginning to creep upwards, however, insurers want a rethink.
Casady explains: “The ARP has been in place for the past decade and every year until 2008 the claims position has been about £5m paid. Each year you get roughly the same amount of premium in and that neutralises it. But 2008 was unusual – there was a cash call for the first time.”
Since October the position has become clearer and the value of claims spiralling out of the 2008 ARP stood at £37m – and it could rise further, with a high-end estimate of £50m.
“We’re going through some catastrophic times,” Casady says.
Steve Holland, professions director at broker Lockton International, adds: “The SRA says the ARP will be kept, but insurers are very unhappy about that and it’s reaching crisis point.”
Major PIIs such as QBE, Zurich and Travelers have come together with the Association of British Insurers to put together a paper outlining why they feel the current PII regime should be reviewed.
Casady says this will pose questions about whether firms should pay levies or if policy wordings should be revised to allow increased competition in the sector.
Whatever the High Court decides, Quinn will be a catalyst for major change in the PII market. It is inevitable that rates will harden this year, which could trigger a contraction at the small end of the profession and revolutionise the make-up of the legal sector.