Insurer fears over escalating costs prompt Solicitors’ Regulation Authority to crack down on ARP

Hiscox has pulled out of offering professional indemnity to solicitors, blaming the deteriorating state of the market.

The Lloyd’s insurer is concerned about increases in recession-related fraud, punitive regulations and the escalating costs of paying for the assigned risk pool (ARP), which is likely to be swelled this year by Quinn customers unable to get cover.

Liability underwriting manager Justin Bowen said the decision to pull out was not “taken lightly’, especially as Hiscox considered itself a market leader. He added that as well as having to offer six years’ run-off cover, they faced restrictive policy terms.

“The recession has created more claims and uncovered more fraud. And when we look at the 2008/2009 year, the estimates are around £45m of losses for the ARP, which is roughly around 20% of the premium paid into the entire marketplace.

“That is an unknown quantity that we have to deal with on our balance sheets and, I suppose even more importantly, 20p in every solicitors’ pound is going towards funding that ARP. It seems disproportionate.”

Latest available estimates for 2008/2009 reveal Quinn gobbled up around £22m worth of solicitors’ business, frequently offering business to those firms unable to obtain cover elsewhere.

Bowen added: “Obviously, with Quinn not being in the marketplace, as we currently understand, it means there will be a large number of firms coming back into the open market and some of those guys won’t be able to get cover.”

The Solicitors’ Regulation Authority (SRA) had proposed scrapping the ARP but instead it will now ban new law firms entering and limit the amount of time a firm can spend in the pool from two years to one.

Chartis vice-president of financial lines Liz Ilott said there should be no cover if premiums are unpaid by ARP solicitors and the pool should be funded by a central levy on all solicitors’ firms.

She said: “The situation will be exacerbated as the number of firms in the ARP could easily double this year. So it is becoming critical that changes happen quickly.

“Unfortunately, it’s unlikely we will see significant change until the 2011 renewals, which means that premiums for solicitors’ PI will rise this year, in part to cover the likely increase in claims arising from those in the ARP.”

SRA chief executive Antony Townsend said: “The SRA board has recently considered all aspects of the ARP, following extensive consultation with the profession and insurers, and has made significant alterations to the eligibility and length of stay for firms in the pool from 1 October this year.

“The SRA has also launched a root and branch review of the compensation arrangements, encompassing PI insurance, the Compensation Fund, and the ARP, with a view to introducing further changes in 2011. In the meantime, we will be monitoring the situation closely.”

Meanwhile, brokers are beginning to prepare themselves for renewing premiums before the October deadline.

Clear Insurance Management professional risks director Daniel Innes said everyone expected increased rates. “Rates will go up for anybody who is in a small law firm of up to three people. Larger law firms will have a stable market; they always have had as they are bigger, perceived to be safer and more attractive to insurers. As a result, they’ll probably have stable premium.”