Each September, the rush to place solicitors’ professional indemnity cover kicks in, but this year it’s tougher than ever. As insurers leave the market in droves and ARP numbers swell, the industry is demanding a rethink of the system
“I’m bloody sick of it. I can’t stand solicitors’ PI,” moans one stressed out broker. He has good reason to complain. Brokers are regularly sweating through 16-hour days as they scramble to secure solicitors’ professional indemnity by the 1 October deadline.
Finding solicitors’ PI is always tough, but this year is proving exceptional. Brokers have had to find new placements following a reduction in risk appetite and a clutch of insurers dropping out of the market. Meanwhile, insurers have been pushing the Solicitors Regulation Authority (SRA) for reform, warning that failure to act will mean that huge numbers of solicitors are uninsurable in the future.
Lockton executive director of professions Steve Holland calls it “the toughest year yet” since the solicitors’ assigned risks pool (ARP) was introduced 10 years ago.
So, looking first at capacity, what has led to the dramatic reduction? Hiscox and Catlin, two of the smaller players, were first to react by pulling out of the market earlier this year. RSA, which last year wrote £13.5m, is not accepting new business for compulsory limit covers. Zurich has said it is “significantly reducing capacity for new businesses”. Meanwhile, Chartis, the biggest underwriter of solicitors’ PI at £37m last year, says it “does not have an appetite” to take on new firms with less than 10 partners.
But the biggest bombshell for brokers has been the demise of Quinn, which released around 1,900 sole practitioners and 1,000 small firms into the market. Finding other insurers to step in may be tricky because of the increased risks of covering smaller law firms, typically those with between two and four partners. They don’t have the checks and balances of bigger firms, and are statistically more likely to face a claim.
And, unlike a sole practitioner, under the current framework insurers have to continue offering cover to small firms even if a partner is deemed to be dishonest or fraudulent. Consequently, sources believe that rates are rising by 10% for 10-plus partner firms and up to 15%-20% for two- to four-partner firms. Sole practitioners face a rate rise somewhere in between the two groups.
Holland says: “The larger law firms will weather this hardening of rates relatively well in comparison to the increases that we’re seeing for the smaller practices. The sole practitioners and the two- to three-partner practices are probably taking the brunt of these increases.
“Couple the size of the firm with their work type, and if they’re doing predominantly residential conveyancing or commercial property, those are the areas that are causing the claims and where the rates are going up most.”
Mind the gap
The void left by withdrawing insurers, especially for smaller firms, has to some extent been filled by Ukrainian-based Lemma Insurance Company Europe, which will write around £20m, and new entrants Vision Underwriting and Danish firm Alpha Insurance. Giles-owned Ink Underwriting has also opened up a PI scheme, while Inter Hanover has stepped up capacity to fill the gap.
Lemma has a financial rating of B+ (AM Best), below the insurance industry A-rating gold standard. Alpha has never asked for a rating, according to AM Best.
One broker comments: “I’m recommending Lemma because I have no alternative. It’s a strange situation considering I was previously recommending clients to bigger insurers like Aviva. But at least it’s plugging a gap in the market.”
The hole left by Quinn has also been partially filled by one of the established underwriters, Travelers Insurance, which is working with one of Quinn’s former brokers Prime Professions.
However, the agreement has stretched Travelers to the limit. Last week, it sent an email to brokers warning it “cannot guarantee we will be able to quote everything we receive”.
All this begs the question: will the ARP be swelled further this year by solicitors’ firms that haven’t managed to secure cover? Every insurer that underwrites solicitors’ PI has to cover a corresponding proportion of the ARP – a heavy burden given the nature of the risks in the pool (see box ‘What is the ARP?’, below).
UIB divisional director Simon Lovat is optimistic. “My expectation is that it will not be the doom and gloom that people like myself were saying three months ago,” he says. “The market has, as it always does, stepped up to the plate and provided the capacity.”
But others aren’t so confident. A spokesman for Clear Insurance said that the ARP could triple from 260 last year, to around 750 firms this year. “It would take a very brave manager to say ‘I’d like go after solicitors this year’, bearing in mind the potentially massive exposure to the ARP.”
Holland is equally unconvinced. He believes that ARP costs could cancel out much of the qualifying insurers’ anticipated profits. “They write the business, they run their numbers and try to calculate the right rate for the firms they insure. But what they have to do now is work out what they’re not insuring through the backdoor in the ARP.
“There were approximately 260 firms in there for the 2009-10 period. We think that could double. Some others in the market have said that there could be a thousand firms in there, though it’s difficult to predict actual numbers.”
Insurers are getting vocal with their concerns about the ARP. Latest figures for the 2008-09 season show that £43.5m claims have been paid out for ARP firms against a market worth £226m. A further blow is that only half of all firms in the ARP end up actually paying their premium.
There is also worry about recession-related fraud. Underwriters say they are robbed of their ability to clamp down on fraud and dishonesty because of the restrictive terms and conditions set by the SRA. This means that an insurer has to continue to cover a solicitors’ practice, even if one of the practitioners is deemed to be dishonest or fraudulent. Underwriters also have to offer six years of run-off cover, even if a firm closes because of a conviction for fraud.
Zurich head of legal professions Jenny Screech also points out that the mere fact that a solicitor can operate without being able to afford cover is a worry. “There is no issue of self-insurance – our concern about firms in the ARP not being able to pay their premium is that it raises a serious question as to whether such firms are in fact solvent. If they are not solvent, then we consider that consumer protection is compromised if they are able to continue to practise, which includes the handling of clients’ money.”
Call to action
As a result, there is mounting pressure on the SRA to vastly improve the situation next year. It has already made some changes to the ARP and has promised a further “root and branch” reform.
But some are unimpressed. “The SRA has done very little to address these problems,” UIB’s Lovat says. “Everything they have suggested so far is window dressing. The PI business needs a thorough reform so that insurers can cover a firm of solicitors with some degree of confidence.”
Screech argues that the SRA’s reforms must include fundamental changes to the ARP and the way it is funded, an easing of the restrictive terms and conditions, and action to more robustly regulate solicitors.
An SRA spokesman says that it has conferred with the legal profession, the Law Society, Legal Services Board, stakeholders and the ABI in its root-and-branch review, which should go out for consultation in December in time for the October 2011 renewal season. He says the funding of the ARP, and the scope of the minimum terms and conditions, were “integral” to the review.
"The SRA is moving towards a new regime of outcomes-focused regulation, which will concentrate our efforts on those firms presenting the most risks to clients, while allowing those that act responsibly to operate with less interference.”
Clearly, the SRA reforms will be critical in ending the uncertainty and drama that surrounds the annual renewal season. This year, however, solicitors’ PI brokers can look forward to some long nights as the 1 October deadline approaches. IT
What is the ARP?
The assigned risks pool (ARP) is a last resort for solicitors who miss the October deadline to get professional indemnity cover. Solicitors were allowed to use the pool for two years but the SRA, under pressure from insurers, has now reduced that to one year. The SRA has also conceded ground by promising to close down firms that don't pay their premiums, and has barred new solicitors firms from entering the pool.
However, insurers are particularly unhappy about the high claims costs of firms in the pool, which is equivalent to around 20% of the total premium collected across the market. The cost of the claims is split up according to the insurers' share of solicitors' PI on the open market.