The SRA is proposing changes to Solicitors’ professional indemnity insurance, which will move the minimum cover limit to £500,000 or £1m for conveyancing
Brokers have reacted with frustration at the SRA’s proposals to move the benchmarks for solicitors’ PII, lowering the minimum cover limit to £500,000 or £1m for the notoriously risky conveyancing.
The SRA hopes lower limits will encourage insurers to offer cheaper premiums to hard-pressed smaller solicitor firms.
But brokers have numerous concerns: from an incomplete dataset – one broker referred to it as “fundamentally flawed” – to illogical reasoning that premiums will reduce and savings be passed on, to the insurance industry yet again being forced to act as “policemen” to solicitors instead of the regulator stepping in to stamp out dodgy practices.
Brokers agreed that the market is currently competitive and not in need of a shake-up like the SRA suggests. Reforms may have been useful a few years ago, brokers said, but now dozens of insurers battle it out over smaller firms.
Howden director John Wooldridge blasted the proposed changes as “nonsensical” and “lunacy”, while Inperio director Simon Lovat suggested that the idea that the reforms would lead to a reduction in premiums was “whimsical”.
Martin Ellis, partner and head of UK professions and legal practices group at JLT, said the proposals needed to be “talked through thoroughly”.
JLT, which has around 15% of the market share and works with larger and smaller firms, is analysing its own data to ensure it is “better-informed” to engage in discussions with the regulator.
It remains to be seen whether its conclusions will match the SRA’s.
A push for cheaper premiums
The SRA is using historic claims data to propose changes to current rules which mean that law firms must have a minimum cover of £2m for a single claim, rising to £3m for firms with certain structures.
The SRA says that 10 years of PII claims data shows that 98 percent of claims are settled for less than the proposed £500,000 single claim limit - therefore solicitors should be allowed more ’flexiblity’ by choosing a lower limit if they want. Half of those claims were for conveyancing.
However, Lovat explained, you would expect at least 98% of the premium to fall into this amount. Therefore, a reduction of 5-10% in premiums is unlikely.
“Because by their [the SRA’s] own admission, almost all the claims occur in that layer,” Lovat said, ”Anything above that layer is probably more margin for an insurance company, if we are honest with ourselves.”
Refuting this, the SRA said its evidence showed the reforms ”could lead to lower insurance premium costs for many firms, particularly small firms.”
The LSB has previously rejected similar proposals
Brokers also argue that these proposals have been put forward in the past and been rejected by the insurers and brokers.
The SRA, under the leadership of Crispin Passmore, has tried and failed to push through similar proposals before, but it was rejected by the Legal Services Board (LSB) owing to a lack of evidence.
However, the SRA now appears confident that its proposals can pass now that it has conducted the “most extensive research ever undertaken into the PII legal services market”.
It said: ”The LSB clearly stated that it did not disagree with the principles behind our 2014 application, saying it ‘welcomed the SRA’s decision to comprehensively review financial protection arrangements’. However, it concluded that more evidence would be required if it was to be persuaded of the case for specific changes.”
At the previous consultation, JLT profession head Ellis said, insurers told the SRA and LSB that they could not see any saving from the reforms that would make a meaningful difference to premiums.
If the reforms go through and firms do save money, Ellis added, the general view is that firms would be “unlikely” to pass those onto consumers immediately, if at all.
The SRA has said that it ”cannot guarantee this or oblige firms to pass on any savings to customers”, though it hopes that “this would occur in a competitive marketplace.”
A “gold-plated” product
The current product offering is “copper-bottomed” according to Woolridge and “gold-plated” according to Ellis.
Changes to it could lead to better firms seeking add-ons to the basic required coverage, meaning any premium reduction may be cancelled out.
Meanwhile, the riskier firms may opt for less.
Brokers will have to convince clients that they need higher levels of cover than the minimum states, but their explanations may fall on deaf ears.
Under the proposals, law firms would be able to opt out of conveyancing cover. This would force them to drop conveyancing, with the bonus of more affordable premiums, as this risky part of the insurance would no longer be required.
This could be good for consumers, if law firms with bad risks in conveyancing move out of the area.
However, brokers argue that it is the responsibility of the regulator, not the insurance industry, to police and discourage negligent behaviour in conveyancing.
Consumer protection worries
Elsewhere, there are other major concerns brokers have about the way claims will be capped.
If dodgy solicitors do sting the public, under the new rules, consumers could be left out of pocket.
This because the SRA is bringing in a new form of cap, called an aggregation cap.
Currently, insurers are liable to pay out on numerous claims, but each one is capped at at least £2m.
Under the new rules, the SRA plans to bring in a different form of run-off cap, one which adds the claims and then puts a ceiling on the total.
The minimum would be £3m for conveyancing cover and £1.5m for other law firms that cease trading.
According to the SRA, the current run-off arrangements can have “an adverse effect” on firms that seek to close and force solicitors to delay their retirement because they cannot afford the cost. This can lead to consumer protection issues if they keep offering legal services when they should have closed.
In addition, the SRA said it will offer “opportunities” for a “more open market in run-off cover to develop”.
However, brokers are worried that this could cause problems for claimants.
For example, under the new rules, say a solicitor who works with three neighbours elects for conveyancing cover capped at £3m, and later it emerges that wrongdoing has taken place.
This means if the three neighbours put in claims for £2m each, only the first will get the full amount, while the next will receive a reduced amount and the third could be left with nothing.
If the proposed reforms were to kick in, 442 claimants would be at risk according to the SRA’s data. These would be significant claims.
Wooldridge said: “The Daily Mail will have an absolute field day when these law firms that have been up to no good and the consumer, on the street, is bankrupted as a result of these changes.”
Data isn’t “the full picture”
Finally, there are question marks regarding the dataset being used by the SRA to push for these reforms.
The claims data was voluntarily and anonymously provided by a majority of insurers currently operating in the market. It accounts for 75% of insurance policies by premiums over a 10-year period beginning in 2004.
However, this means that it only extends up to 2014 - meaning it does not reflect the changing market in the last four years.
“It certainly isn’t the full picture,” Ellis conceded.
In addition, some of the significant players in the smaller firms PII space in the early 2010s have left the market, though the SRA confirmed it has managed to collect data for ‘some’ of these firms.
The SRA was able to get data for collapsed unrated insurer Enterprise in 2016, which it did not include in its analysis, but says is “consistent with the wider data set”.
For confidentiality reasons it was unable to confirm whether its data included defunct Latvia-based unrated insurer Balva, which crashed out of the market in 2013, or others that have exited the business.
Although the SRA’s previous attempt to instigate similar reforms was quickly rejected by the LSB, it has acted on its concerns and hopes that its new evidence will convince the board to push its proposals through.
Brokers think it unlikely that they will fall at the last hurdle again, but worry that this could come at a cost to small firms and the public.