If Charles Darwin were alive today, there would be no need for him to visit the Galapagos Islands to find proof of his theories. He could simply stroll down to EC3 and find clear evidence among the specialist insurance law firms that the ability to adapt to change in any environment is a fundament to survival.
Moreover, the firms in question are facing huge evolutionary forces. First, of course, the environment is more hostile than ever: the trend towards consolidation of panels (and indeed of insurers) and concurrent downward pressure on fees has not relented over the past year – if anything, it has increased.
Second, the market is not the discrete ecosystem that it once was: innovations in corporate capital and the novel application of banking and finance techniques – to reinsurance in particular – mean that the sector is being serviced by a much wider and more diverse pool of professionals. That is not to say insurance is becoming a non-specialist market. Far from it. Rather, it is saying that traditionally specialist, and more or less dedicated, insurance firms are now having to compete with a whole new range of rivals.
Not surprisingly, the issue of panel cuts causes considerable disquiet in the legal profession. There is grudging acknowledgement that, from the insurer's perspective, the cuts are both inevitable and commercially intelligent. But even for those firms which survive the cull, the prospects are bleak. Yes, they will receive a greater volume of work, but the pressure on fees is such that many will struggle to make it profitable. Indeed, not only are firms being asked to commit increasing amounts of resources without any increase in fees, but clients are also demanding free extras, such as management assistance and lawyers on secondment. Moreover, some insurers are asking for flat-rate discounts, simply for the honour of being instructed by them. (Insurers know, after all, that they are in a buyer's market.)
The end result of this, say lawyers, is simple – and perhaps equally inevitable. In order to protect their margins, firms will use less-experienced lawyers, which will ultimately reflect on the quality of the work. And it is the medium-sized firms in particular which seem likely to feel the squeeze: the truly niche practices have lower overheads, while the major firms have a depth and breadth of resource that enables them to manage workflow more effectively.
But the ultimate losers in this scenario are the insurers themselves. Poor lawyering can only mean more disputes and a greater end-cost. The lawyers would say that the insurers should bite the bullet and pay realistic levels of fees for the best expertise. We have heard on more than one occasion the prediction that, if clients do not come to their senses, it will simply be uneconomical for many firms to maintain a presence in the insurance market. A handful of firms will therefore be able to charge what they like because the insurers will have no alternative. Once again, insurance law will be a seller's market serviced by a small coterie of specialist firms.
It is not too difficult to spot both wishful thinking and self-interest at work here. The reality is that clients still think they are being overcharged and that firms should look more to their overheads and management systems. It may be that they will bring more services in-house. RSA, for one, has recruited some 20 lawyers nationally. But it seems unlikely, to say the least, that they will revise fees back upwards. Neither will they accept a second-rate service from their lawyers.
What, then, is the answer? The painful truth is that the clients are right. In some ways, this is a litmus test for how commercial and business-like a law firm is. In the real world, if you are facing increased competition the last thing you should do is slash the quality of your product. Instead, you should look to your productivity and cut your overheads.
Fortune favours the brave
In some ways, the legal profession is lucky: it is faced with these problems at a time when the pace of technological development has never been quicker. To their credit, too, many firms are rising to the challenge, with regard to both internal systems and extranets. In their different ways, Rowe & Maw and DLA deserve to be singled out for praise, although they are by no means alone. Both have clearly thought long and hard about the processes involved in their work, and have not been afraid to adapt their business practices to offer a better-value service to clients (and create a competitive advantage over their peers).
Moreover, developments on the internet mean that the way insurers conduct their business is also changing. Some lawyers may regard this as a threat, while for others it is an opportunity. In some ways clients are at the mercy of their advisers here: despite huge strides forward, e-commerce is in its infancy and law firms have been in the enviable position of being able to develop practices from scratch – that is, learn on the job – and to charge clients for the privilege.
Of course, things may not be as fluid here as they were two years ago. Clear market leaders in insurance e-commerce have already emerged – Ashurst Morris Crisp stands head and shoulders above the rest – and it may be too late for new entrants to the field. But the point remains that, while it is definitely harder for firms competing at the volume end of the market, there are nevertheless doors opening elsewhere for those with the flexibility, vision and courage to adapt.
A common market?
Perhaps, though, it is increasingly inaccurate to talk of a single legal insurance market. Rather, there are a number of sub-markets in which different – if sometimes overlapping – pools of firms compete.
And it is the national firms that are winning the battle for volume work, particularly where they have London offices with the capacity to handle more complex cases. This is not, though, merely a function of their presence on the ground around the country. In part at least, it is also due to their cast of mind.
Having met with considerable resistance when trying to break into the City market – while nevertheless having to fight on the local front against smaller, probably more economical, regional practices – the national firms are used to competition. As a consequence, they can demonstrate a powerful combination of aggression and innovation (DLA and Hammond Suddards Edge spring to mind). This is proving invaluable to them here, creating a definable market position between the City firms, which have more or less given up the ghost on volume liability, and those regional practices which are having to merge or enter into formal arrangements in order to offer their clients acceptable coverage.
On top of the world
But who is winning the battle at the more specialist end of the market? Is it the classic top 10 corporate practices, or the cream of the EC3s? The truth is, it is probably too close to call at present. But despite having the ground almost literally pulled out from under their feet as the insurance market becomes steadily more corporate, the classic insurance law firms are undoubtedly putting up a good fight.
At the front of the field is Barlow Lyde & Gilbert. If there is still one insurance market, Barlows is arguably the only firm that could seriously claim to service every part of it. (In the words of one client, Barlows is "like a supermarket of experts".) Delivering a faultless service to widespread acclaim among its clients, Barlows is nevertheless also active at the cutting edge. The only caveat issued by clients is that it lacks the comfortable feel of a small firm. Although Barlows may wish to address this, it is perhaps something of an unfair criticism. The day of the cosy little insurance practice – like that of the cosy, self-contained insurance market – is gone, and is not coming back.
It is of course pretty indicative that in the table of top performing law firms – essentially a ranking of those firms with the most star ratings – five of the top 10 are top 10 corporates, with two, CMS Cameron McKenna and Clifford Chance, straddling the two worlds, having dedicated offices in Lloyd's. The City firms have made extensive inroads into the insurance market over the last few years, and it seems more than likely they will continue to seize further ground. For its progress in the last 12 months or so, however, Norton Rose deserves particular praise. Again on the receiving end of consistent praise from its clients, it has made great headway, almost from a standing start. It should expect to feature more heavily in coverage of next year's market.
Other firms that promise much but have yet to fully deliver include Allen & Overy, Ashurst Morris Crisp, Hammond Suddards Edge, Pinsent Curtis and Rowe & Maw. However, it would be a surprise if any firm could at present touch Barlows.