The closure of the assigned risks pool (ARP), the insurer of last resort for all firms, will come at a cost of tens of millions of pounds to the profession, with commercial firms picking up the claims tab for the smaller end of the profession.
Plans were announced by the Solicitors Regulation Authority (SRA) last week to scrap the ARP from the October 2013 renewal date. The cost claims against the final insurance pool will be shared between the profession and insurers participating in the market.
Under the proposals, the first £10m of claims received against the 2013-14 pool will be paid by the profession, with the insurance market picking up the tab for the second £10m. This would layer repeatedly up to £50m, above which any claims will be covered by the markets.
The move comes in response to an SRA-commissioned report that was launched following warnings that the profession would face unprecedented rate hikes if the current insurance framework was left unchanged.
The central criticism from the insurance market is that the cost of paying claims brought against firms in the ARP has risen exponentially since the credit crunch.
All insurers participating in the market contribute a proportion of the premium collected to the ARP.
The cost is passed on to the profession through premium rates, meaning the top commercial firms, which are assessed as having a better risk profile, pay a disproportionate insurance price compared with smaller firms with more profound risks.
Furthermore, with all firms regardless of size required to have the same standard of insurance, the cover is among the most expensive in the market, despite the legal profession having a better risk profile than many other industries.
The Association of British Insurers (ABI) said the sector suffered from ”periodic crises caused by a combination of poorly enforced regulation and restrictive policy requirements, such as insurers’ requirement to stay on cover when premiums aren’t maintained, and exacerbated by significant increases in claims in recent years”.
Trying to balance the needs of the profession against the demands of the market that insures it was never going to produce a result that satisfied everyone.
The SRA has rejected plans to repeal the gold-plated cover requirements on all firms, but has agreed to run off the ARP from 2013 and abandon the single renewal date.
From 2013 the SRA will operate a system whereby insurers offer a three-month extended policy period to firms that cannot obtain professional indemnity insurance for the following year.
The initiative has divided the sector, with the Law Society praising it as a ”sensible” move, while the ABI has condemned it as an “opportunity missed”.
Mark Casady, schemes portfolio manager at insurer QBE, has been one of the SRA’s fiercest critics.
He said the “major recipients” of the changes would be conveyancers, who would be covered by the same terms and at the same price as major corporate firms but have a poorer claims profile.
He added that the SRA had “capitulated” in conceding to keep standard cover in place for members of the Council of Mortgage Lenders, which has welcomed the move.
“The ARP is an evil, it’s as simple as that,” Casady said. “It’s a hospice for dying firms and it’s wrong that such a vehicle remains in place when it’s not fit for purpose.”
The markets will begin gearing up for the 2011 October renewal in the coming weeks and these changes will weigh heavily on the minds of insurers.
In the longer term, rather than being able to put firms that cannot pay their premiums in the ARP, insurers will be required to keep them on their books and pay legal claims over a period of six years.
As Casady highlights, some insurers would prefer not to write cover for firms that could make serious losses just a year later. That could mean insurers pulling away from the lower end
of the market for a second consecutive year, piling the pressure on rates at the top.
This year the insurance market’s warnings on rates should be heeded. With plenty of change in the pipeline, firms will want to be certain they can get cover on the market rather than being forced into the ARP and facing the prospect of closure.