Spending wisely

Regulation is the overriding issue for in-house insurance lawyers. Our experts examine where they allocate legal spend in a rapidly changing environment

Sean McGovern
Sean McGovern

What’s the biggest regulatory issue you will be dealing with this year, and do you anticipate managing it externally or internally?

Sean McGovern, general counsel, Lloyd’s of London: There are two: the implementation of Solvency II and the transition to the new regulatory architecture here in the UK. ­Solvency II is the biggest single change to insurance regulation in Europe in a generation.

Although the overall objective of better aligning capital with risk is hard to argue with, the detailed ­requirements and implementation are causing significant work and cost. The FSA estimates that it will cost the insurance industry £2bn to ­implement.

The total bill for Lloyd’s is expected to be £300m for building new capital models and investing in an improved risk management framework. We’re trying to do as much work in-house as we can so we don’t lose the expertise.

The move to twin peaks regulation in the UK is a massive shift for the whole financial services industry – we’ll be going through a very ­uncertain transition period for a while and the impact the new arrangements will have on the ­structure and future competitiveness of the industry is ­unclear at the ­moment.

Kenneth Underhill, general ­counsel, ACE European Group: We don’t see one single dominant legal regulatory issue on the horizon for 2012. Nevertheless, there are many collectively significant matters that we’re responding to.

Of these, the most notable include Solvency II, the proposed revisions to the Insurance Mediation Directive, an array of consultation papers in ­respect of consumer protection, and changes in oversight, control and structure of the UK regulator.

More broadly, we’re seeing a shift in approach by regulators generally towards a more proactive and sometimes more intrusive style. This is true not only in the UK, but across the range of mature and emerging ­insurance markets in which we ­operate.

We’ll primarily respond to these various issues internally, with the ­assistance of our advisory partners where appropriate.

Derek Walsh, group general counsel, RSA: The ­proposed changes to the UK regulatory architecture is one of the biggest regulatory issues facing the industry.

We’re following closely the passage of the draft Financial Services Bill through Parliament and lobbying MPs and other stakeholders directly on our specific concerns with the draft bill and will manage it ­internally.

The uncertainty that surrounds the timetable for the implementation of Solvency II is another key issue for us in 2012. The underlying legislation (Omnibus II) has been further delayed and is unlikely to be approved until the fourth quarter of 2012, which means the final Solvency II text ­cannot be issued until Omnibus II is approved.

We’re managing the ­Solvency II programme internally, but are also using additional staff on ­contracts to support elements of the programme as required.

Should claims legal spend and non-claims legal spend be managed together, and does this help insurers to better leverage legal spend?

McGovern: Integrated management of all claims expenditure is important to avoid duplication and claims ­leakage.

Underhill: ACE doesn’t manage claims and non-claims legal spend together. We have separate legal and claims departments and separate ­external legal panels for each.

However, there are significant crossovers between the panels and our approach is always to use these synergies to leverage cost benefits, regardless of the actual responsibility for that expense. It’s an approach that generally works well for us.

Walsh: Traditionally it’s not been managed together in our industry, where claims and non-claims legal spend has been separated. But I do feel there should be close alignment between legal and claims spend.

I believe the legal team has a significant role to play to assist with the ­external legal spend and claims work to ensure appropriate synergies are achieved and external legal relationships managed appropriately. This will be a major objective for my team in 2012.

Is legal spend controlled by you as a legal department, or does the company board have an input? What determines which work is sent out?

McGovern: I’m ultimately responsible for all our legal expenditure and am accountable to the CEO. It’s my job to determine what we resource for internally and what we send ­externally. As a rule we try to do as much work as possible in-house.

Underhill: Legal spend’s controlled by the legal department and we ­provide clients with estimates in ­advance. We have a reasonably sized legal department, and our ethos is always to retain and undertake as much work as possible in-house, ­primarily using our external partners where specialist expertise or extra ­resource is required.

Walsh: I, and my [various] regional general counsel, control legal spend in accordance with annual plans and budgets. We have a lot of freedom of choice as to where we send external legal work. Generally where the work goes isn’t something the board would seek to influence. The exception to this would obviously be on a transformational transaction, where our board would want to be involved with the appointment of external advisers.

On the issue of external legal spend, I’d also comment that we’ve recruited really talented lawyers who understand our business, so our aim is to be more self-sufficient in terms of legal requirements. I aim to only send out work where we lack subject-matter expertise, where there’s likely to be a large volume of documents ­involved or it’s not economical for us to do it internally. Like the rest of the business, I’m constantly striving to increase efficiency and save on cost.

What’s the biggest challenge for firms advising insurance companies? What can be done by lawyers to improve relations?

McGovern: Building partnerships with clients is key. Adding value through assisting with in-house training and risk management is ­important to understanding the client’s business issues – if you invest in building that understanding, you’ll be in a better position to ­provide sound advice and demonstrate value added.

Underhill: From our point of view, the need for added value – aligned to pithy commercial advice – is the key to keeping us and our clients happy. At ACE the foundation of our ­approach is to build long-term ­relationships with our external legal partners. That’s because it’s our ­experience that the best outcomes follow when our partners have a good understanding of what we require, and over time this results in the added value we seek and our ­expectations being better.

Walsh: I also encourage law firms to generally align their interests with the needs of our industry and our business specifically; be our partner, not just our adviser; and structure their advice and fees to share in our own successes and failures.

Another challenge is understanding our business on a global basis and providing better global service on a consistent basis, not just being good in the jurisdiction where the advice is sought.

Also, keeping up with all the ­regulatory changes and making a commercial assessment of what the impact will be for their clients. Often this is made all the more difficult for legal firms because insurance ­companies often have better insight about pipeline changes in advance.

In the long term, is reform of the legal profession, either through consolidation or alternative business structure (ABS) conversion, good for the insurance market? Will it benefit clients?

McGovern: The legal profession must be subject to the same economic forces as any other business. Legal firms today need to be very nimble to survive – clients are less loyal than they were in the past and are looking for value for money and efficiency when they buy external legal service.

Underhill: Aspirationally, I’d like to think that, with the introduction of more commercially minded owners, we might see a move away from hourly billing to an approach more orientated towards outcomes.

This would certainly align external legal partners more closely with our business clients.

Walsh: As a consumer of legal ­services, anything that increases value for money, choice and competition is clearly a good thing. It’s very early days for ABSs, but I’ll watch with interest how they develop.

Consolidation of firms seems to make sense where there’s little existing overlap between the businesses and particularly where merged firms can offer a more global proposition. That said, where the specialisms of [merged] firms are aligned, at times I’d be concerned that the result could mean less choice for buyers.