Legal expenses insurance has become a battleground where solicitors are moving in to challenge traditional players. Michael Faulkner reports
In June Blakemores, a Birmingham-based firm of solicitors, made a bold step. In a move that would see it effectively struck off the panels of all the major legal expenses insurers, it launched its own legal expense subsidiary, Perception.
Selling both before-the-event (BTE) and after-the-event (ATE) insurance, the subsidiary is now competing with traditional providers, such as DAS and Abbey Legal.
Blakemores is not alone in making this move. Other solicitors are beginning to see the value in breaking free from the providers' panels to sell legal expenses insurance (LEI) direct to the consumer. They want control over their own work generation, and they say they can provide a more cost effective solution by cutting out the intermediary role played by the traditional providers.
If successful, they could put the rest of the market under considerable pressure.
The traditional providers are nevertheless sceptical. They question the newcomers' understanding of the insurance market and its practicalities. They do not see them being ultimately successful.
The direct approach by solicitors is already well established in the motor market, particularly in respect of ATE insurance. But ARC Legal Assistance managing director Helen Withers says that it is inevitable that solicitors will move into other sectors, such as household and commercial. This will be driven by the increasing contraction of the providers' legal panels and the tougher requirements for panel solicitors to retain their places.
"As the solicitors' market has developed to meet the increasingly demanding requirements of traditional providers, many firms have begun to wonder whether they could not become LEI providers themselves, sourcing their own underwriting and effectively cutting out the middleman," says Withers.
"Strategically, solicitors will have to make a decision on whether they wish to retain their panel status or to enter the market directly."
The traditional legal expenses providers are dismissive of solicitors muscling in on their territory.
"The idea of solicitors selling and managing insurance has all the hallmarks of not being successful," says DAS assistant general manager Tony Buss. "You have to ask why underwriters would want to underwrite it."
Buss also questions how solicitors would attract the business. He points out that legal expenses insurance is normally cross-sold with other insurance products. "They will need to team up with someone. But how will they develop a relationship with brokers?" he asks.
Composite Legal Expenses managing director John Mullin says that solicitors could fall foul of a conflict of interest if they take the direct approach. A legal expenses provider, he argues, needs to have in mind the best interests of the underwriter, but in the case of a solicitor selling direct, a conflict could arise as the client will come first.
"I don't know how this can be resolved without an intermediary."
The traditional providers also question solicitors' knowledge and experience of the sale of insurance products. This is of particular significance, they argue, for solicitors looking to move down the commercial and household routes, as these areas cover a much more diverse range of cases and requires a specialist underwriting and risk management assistance.
Abbey Legal Protection sales and marketing manager Nicky Amor says: "Most lawyers aren't traditionally set up to run things on a volume basis. They don't have call centre-type facilities, for instance. And few solicitors understand the principles and practicalities of an insurance product.
"If a law firm is to do well it needs to understand the product and risk management, otherwise the underwriter will get burned. There is a lot more to legal expenses than simply providing advice.
"The traditional providers are much better placed to deliver an insurance product that is an efficient risk management tool - particularly so in commercial legal expenses and large volume personal lines."
Yet despite the criticisms, underwriters are keen to back direct entry solicitors. Lloyd's insurer Euclidian underwrites Blackmores' scheme. And Brit Insurance is also positive about solicitors' future in the market.
Brit legal expenses underwriter Leo Gibbons says: "Our view is that working with solicitors is what legal expenses will be all about. The solicitors generate their own leads and cases, and we have a much tighter control on their fees and risk management. It is much more efficient."
Gibbons also says that reinsurance capacity, which has becoming more restricted since the demise of The Accident Group (TAG), is less of an issue where solicitors are concerned.
"Some of the markets which don't like claims managers [like TAG] would consider going down the individual solicitors route," he says. The attraction of solicitors, he says, is their smaller size compared to the larger multi-panel schemes.
Gibbons accepts that many solicitors do not have the necessary insurance knowledge to run legal expenses schemes, but he says that the level of expertise is gradually increasing to the point where "many are already up to speed".
He also points out there are a number of specialist intermediaries who can provide solicitors with the requisite structural support, such as case management systems and audit facilities.
Arc Legal Assistance is one of the specialists that assists solicitors to develop a direct market. This includes constructing bespoke contracts between law firms and underwriters, and delivering risk management.
So what do these developments mean for the legal expenses market?
Withers argues that the rise of the direct approach will put traditional providers under increasing competitive pressure. By removing the 'middle man' and selling direct, solicitors will be able to offer a more cost-effective solution to the consumer.
She argues that in the short term the traditional providers will find it increasingly difficult to hold on to accounts, particularly those relating to motor insurance. In the longer term, they will be further undermined as fewer solicitors will be available to work on legal expenses panels.
"The market has become stagnant and dominated by a handful of players. Now the traditional LEI providers need to recognise that the market is developing. The pendulum will gradually swing towards solicitors, given their size and broad expertise.
"The traditional providers could be wrong footed by these new developments. In recent years some large contracts have moved to less well known providers."
Withers argues that in order to compete effectively the traditional providers will need to adapt and become more streamlined.
"The traditional model is inefficient because it duplicates costs, such as claims handling, where the policyholder first calls the LEI provider, who then passes the call to the panel solicitor."
Not surprisingly, the traditional providers are sceptical of the solicitors' potential to impact upon the market.
Buss comments: "Are we concerned? They are competitors - we recognise that. But we don't see them as a major threat. We are more concerned about the long-term competitors."
Amor claims to even welcome the additional competition.
"Competition is healthy and adds to quality. The legal expenses market is not the hottest area for competition. A little bit of extra competition at the right level is good. "Only 5%-10% of businesses have legal expenses cover."
Despite the traditional providers' apparent lack of concern, the solicitors are keen to raid their territory. The battleground is set.
Who will be ultimately successful remains to be seen. But the traditional providers should be keeping a close eye on what their panel solicitors might be doing behind their backs.