SIF: still a runner – or dead in the water?

In the light of the CLLS's recent condemnation of SIF, Shaun Pye wonders if the mutual fund stands a chance against the might of the City.

In the bowels of the Solicitors Indemnity Fund (SIF) HQ, staff can definitely hear the fat lady clearing her throat and preparing to sing.

While last week's call from the November Group of City firms for SIF to be scrapped surprised no one, the response to the Law Society's consultation on the future of professional indemnity from the City of London Law Society (CLLS) will have sent shock waves around Chancery Lane.

Following wide consultation – 200 draft copies of the response were circulated to firms for comments – the CLLS has condemned the mutual fund with more vehemence than the supposed extremists at the November Group.

The November Group feels that an “assigned risks pool” should be set up to give uninsurable firms two years grace to get their houses in order. The CLLS seems quite happy to let uninsurable firms go to the wall.

Only about 10 per cent of the country's lawyers work in the City. But it is a pretty powerful 10 per cent.

The biggest dozen firms alone pay 5 per cent of the total annual SIF bill. Tony Sacker, president of the CLLS, says a number of City firms pay more than £1m a year in contributions to SIF for cover of £1m.

Elizabeth Mullins, managing director of SIF, concedes that without the financial muscle of the City any mutual fund is doomed.

Some argue that the Law Society, which will decide SIF's fate in September, is more sympathetic to the wishes of the high street firms.

Try asking the high street firms that. Recent changes to the indemnity rules, most notably the introduction for 1998/99 of risk banding, are hammering the high street.

Michael Dalton, a sole practitioner who will attempt to judicially review the SIF rules next month, told The Lawyer last week that the Law Society “doesn't want small practitioners any more”.

And with new Law Society president Michael Mathews a partner at Clifford Chance, the City's opinion of SIF takes on, if not terminal, certainly critical significance.

What is the City's argument? The truth is that SIF has been doing quite well during the four-month consultation period on professional indemnity. Insurance is a complicated issue, but at numerous roadshows Mullins has, very effectively, simplified the problem for the profession.

She has argued that SIF must be cheaper than the open market because SIF does not charge any profits. She has supported her theory with figures from Whittington Insurance Services (showing SIF to be about 30 per cent cheaper than the open market) and cost comparisons obtained by the Law Society for 58 specimen firms. Nearly 70 per cent of them paid less under SIF.

In their official responses to the consultation, both the CLLS and the November Group have chosen to tackle this point head on. The CLLS argues that, in compiling the consultation paper, the Law Society overestimated both brokers' fees and insurers' profits and underestimated the effects of competition, economies of scale and the discipline imposed on firms by harsh market reality.

During the roadshows, George Ritchie, a consultant at Freshfields, and Edward Coulson, a partner at Hammond Suddards, put the argument for allowing firms to insure on the open market. But Christopher Hales, a consultant with Holman Fenwick & Willan and founder of the November Group, says their ability to press their cases was hampered by a lack of hard statistics.

When the November Group set out to produce its own figures, the Law Society refused it access to key documents, including what is thought to be a highly critical 1997 report on SIF from independent actuary Tillinghast. So it was forced to commission its own cost comparisons from brokers Nelson Hurst & Marsh and Robert Fleming Risks.

The report showed that, of 109 firms, more than 70 per cent could buy cheaper insurance on the open market than from SIF. Only firms of between seven and ten partners did better under SIF, and sole practitioners would have achieved the biggest savings of all on the open market.

But there are a number of problems with these figures. For a start, they do not take into account the fact that this year SIF is introducing risk banding which is designed to make firms' contributions more accurately reflect their claims records.

Then there is the fact that the specimen firms all responded to an initial approach by Nelson Hurst, and so are, by definition, a self-selected sample. They are no more representative of the profession than the Law Society's 58 firms in April.

Most importantly, insurers can quote however cheaply takes their fancy. They want the business. There is no guarantee that they will be charging such competitive rates in a hardening market two years down the line. The CLLS warns that figures obtained now “must be treated with extreme caution”.

But Nelson Hurst has done enough to confuse the issue. Richard Tapsfield, Linklaters partner and chairman of the CLLS working group on SIF, argues that with no clear cost advantage the council should adopt the scheme that offers the least interference with solicitors' practices – the open market option.

The PricewaterhouseCoopers survey, commissioned by The Lawyer and published three weeks ago, showed half the profession wanted approved insurance and half wanted a mutual fund in one form or another.

Now that the City has given its overwhelming verdict, the scales could tip in favour of the open market. SIF is not yet a dead duck, but the orchestra has just struck up and the fat lady is making her way onto the stage.