Rumour has it that a leading insurer recently brought together all its panel firms for a meeting. At the start of it, they were told: “Anyone not prepared to handle claims at less than £x an hour can leave the room now.”
It is now accepted wisdom that insurers' review of law firm panels has not stopped at simply cutting the number of firms. Pressure to lower rates continues apace and incentives such as end-of-year discounts are now also common – not just because they are being offered by competitive solicitors, but because they are being demanded by the insurers.
And it is not just solicitors who are feeling the squeeze. Barristers have also been warned to improve service levels or cut costs if they want to retain insurer clients.
Martin Staples, senior partner at Vizards Staples & Bannister, last week told The Lawyer's chambers management seminar that unless the Bar dramatically improves the level of service it offers insurers, it faces a bleak future. Staples warns that the junior bar is under the greatest threat but that work will be restricted for everyone.
Although the competition between law firms and chambers for the shrinking amount of work is intense, many chambers nevertheless believe they can compete effectively on price.
Chairman of the Young Bar and tenant at 5 Essex Court Georgina Kent says: “It's not unusual for insurers to instruct certain sets of chambers to conduct work at a very low rate of £50 or £60 per hour.”
Joint senior clerk at Brick Court Chambers, which handles predominantly high-value work, Ian Moyler says: “The reality is that the Bar is cheaper, more efficient and more flexible than most other providers. Brick Court is used to acting direct for in-house departments – which now totals some 15-20 per cent of all instructions.”
“If we can provide prompt, accurate and cost-effective advice to clients why should we have anything to fear?”
Solicitors too are being forced to cut rates – Richard Clarke, head of the insurance litigation department at Jacksons, a firm in the North East retained on Iron Trades' panel, predicts there will be elements within a firm of solicitors working at a similar rate to barristers – though many argue that margins at some firms are being slashed so far that they cannot be cut any further.
“There are a number of firms of solicitors trying to hang in there long enough to fight off the competition,” says Dermod O'Brien, head of chambers at 2 Temple Gardens.
O'Brien says barristers can cut their margins much more than solicitors because overheads equate to only about 25 per cent of a barrister's earnings, a significantly lower percentage than a solicitor's.
Paul Taylor, senior partner at Berrymans Lace Mawer, believes that in the future the kind of lawyer who gets the work will be determined by practice structure. There will be two types of firm, he says, the “short fat cone” and the “tall thin cone”.
The “tall thin cone” firm – among which he numbers his own – describes a firm top-heavy with partners, dealing predominantly with high-value and complex claims, while the “short fat cone” firm has fewer partners but a larger team of associates, paralegals and even unqualified staff, all dealing with volume work.
Taylor says it is the “tall thin cone” firms that are continuing to attract work in a shrinking market.
Two years ago, for example, Berrymans Lace Mawer had a total case intake of 14-15,000. Last year, this jumped to 25,000, the majority of which were insurance related.
Concern is greatest at the other end of the spectrum, particularly for barristers and the so-called “short fat cone” firms, which deal with volume, low-value work.
The junior bar is likely to be badly affected by the Woolf reforms, under which cases will probably be settled earlier, reducing the amount of drafting work that was a good source of income for it. It could even lose much of that kind of work to solicitors.
Taylor, however, believes that the intense pressure on rates is coming not just as a result of the Woolf reforms, but from the insurers' discovery of buying power.
Increasingly, he says, insurers are reaching year-long agreements with their solicitors, stipulating retainer terms, including fees and levels of discounts, which in the future are likely to extend to two or three years.
Insurers are also reaching more formal agreements with chambers, including fixing fee levels and making discount arrangements.
And the insurers are increasingly in the driving seat, using intelligence about firms to their own advantage.
For instance, insurers often know the rates each law firm is charging its competitors, even though this information is supposed to be strictly confidential.
This happens because many insurers are on the same schedules. If, for example, Royal & SunAlliance, CGU and Axa all insured Sainsbury's, the obligation to provide open financial reports to co-insurers could be very revealing.
Such information enables an insurer to not only demand parity from its solicitors but extra discounts too.
Management information is increasingly being used as another weapon to assess and improve the performance of panel solicitors, with insurers demanding detailed information on firms' performance. Firms now have to deliver time-lines, which clearly show dates such as when the claim was made, when settlement was attempted and when proceedings were issued.
They also require estimates to calculate how much of the total claims expenditure goes to any given firm. This allows them to assess how quickly firms are dealing with cases and if they are beating the original estimate.
However, these problems could pale into insignificance in the face of a bigger threat – that the shrinking amount of outsource work could dry up altogether as insurers wake up to the economic sense of retaining control in-house.
“Outsourcing of claims work to solicitors is not necessarily the cheapest option, even though at the moment there are lots of solicitors bidding for insurance work,” says O'Brien.
Iron Trades at one time delegated its motor accident work, but it is now reclaiming that work and handling it internally.
“We are able to provide expert claims management. To delegate would remove authority,” says Eric Hannah, Glasgow claims manager at Iron Trades.
Whatever factors are leading the market changes, the future remains unclear.
Taylor believes that in three years time there will be a one-stop-shop claims handler, with the loss-adjuster and solicitor working in partnership, employing experts that offer a complete service at a fixed rate, but if other insurers follow Iron Trades' lead and decide it is not economical to outsource their entire claims department, it could be a very different story.
But if the insurers decide that they need specialist advice and advocacy work, barristers could still see a dramatic shift in their favour.