In our second feature on the new solicitors' indemnity market, Adrian Leonard takes a look at how things are gearing up for September 1st.
The floodgates have opened. Law firms in England and Wales, victorious in their battle to win a free market for their first £1m in professional indemnity (PI), are in the early stages of inundation by broker mailshots. Already, each has received no less than ten letters reminding them that they must have cover in place by September 1.
Turf has been staked, accusations have flown, and talk of undercutting has surfaced. Meanwhile, the flurry of underwriting activity has just begun, as the first precedent-setting prices have been issued by special-purpose insurer Solicitors' Professional Indemnity Limited (SPIL) – commonly known as the Managing General Agent (MGA). “It is going to be quite a race to the finish,” says Edward Coulson, a partner in the law firm Hammond Suddards.
SPIL, a joint-venture insurer set up by the Law Society and St Paul International, is the anointed successor to the former monopoly insurer, the Solicitors' Indemnity Fund (SIF). Direct-writing SPIL has already sent out to law firms what they call a “preferences mailing,” asking firms to state their preferred limit of indemnity and deductible. SPIL offers £1m layers of cover to indemnify against claims of up to £5m, and will provide additional excess layers. Deductibles range from 0.5% and 3.0% of gross fee income, with a minimum excess of £2,500. Aggregate caps on the excess are also available.
Seventeen other insurers, half of them Lloyd's syndicates, have also met the Law Society's requirements to be “qualifying insurers” eligible to offer solicitors' first million in PI cover. Each must use a wording based on very broad “minimum terms” negotiated by the Society. However, only SPIL will enjoy access to SIF's historical data, and to its claims and administrative staff.
Competition among the 18, and particularly among brokers, is already fierce. Schemes have been mooted, alliances have formed (such as that between Aon and QBE), and group plans are in the works – including that for Lawnet, which previously arranged excess cover for its 50 large member firms. Lawnet has given Marsh the responsibility of broking members' new primary layers.
However, most insurers have been reluctant to begin quoting until SPIL's first prices are revealed, providing a tariff benchmark in what is essentially unknown territory. “We have approached St Paul with a number of risks, and compared to the rates those clients paid to SIF last year, the prices aren't anywhere near as competitive as we thought they might be,” one broker said. He cited the example of a major law firm with a good claims record that would see savings of only a few thousand pounds by insuring with the MGA.
Stressing that the exercise was “only a random sample,” he did not mention that SPIL has decided it will not pay commission to brokers. Net versus gross quoting is bound to cause confusion among insureds. “If firms retain a broker or professional advisor, we are perfectly prepared to do business with them but our quotations are net of any commission the client may pay to a broker,” says Richard Gerrard of St Paul, adding: “We expect to lead the market come the first of September.”
As SPIL sets the ball rolling, intermediaries are aggressively seeking the business of solicitors. “Brokers are falling into two camps,” says Trevor Moss, a director of Nelson Hurst Professional Indemnity. “One is telling solicitors to provide scant information – and promising to get prices based on that. The other is telling solicitors to present their practice in the best possible light by providing a lot of information, to give underwriters a real feel for the firm's attitude toward risk.”
He says it is too early to see what each camp will come up with in terms of cost advantage. But he is sure of one thing: “We do know that those firms taking risk management seriously, and considering professional indemnity insurance with the gravitas which they ought to, not only as insurance but as their licence to practise, will invariably spend a lot more time trying to present themselves in the best possible light.”
Coulson of Hammond Suddards sees no logic in the minimum-information approach: “Although the minimum terms [under the approved wording] largely take away the insurers' right to refuse cover for non-disclosure, there are some sanctions there. It seems to be dancing with the devil to hold back on disclosure,” he says.
“The more information we receive the better,” says Zahid Naqvi, professions underwriter at Hiscox . Both its Lloyd's syndicate 33 and Hiscox Insurance are qualifying insurers. “We understand that firms have claims, but there may have been exceptional circumstances. The more comprehensive the summary presentation the better.”
Claims records have been a hot topic. “Firms need to sort out details of what their claims record is,” Coulson says. Part of that job has already been done by SIF, but competitors are growing concerned about the competitive imbalance of the exercise, since the ongoing activities of SIF – including the run-off of its existing live book of business – are to be assumed by the MGA.
In a recent letter to solicitors' magazine The Lawyer, another Nelson Hurst PI director complained that, in a circular to solicitors, SIF gave firms just 14 days to verify their claims records. “Sadly, for many firms, this could prove a costly mistake – one reflected in their professional indemnity premiums this year,” he wrote. “The information will now be passed to JV Co [the St Paul-Law Society company SPIL] so that they can be given a PI quotation from the MGA.
“Unfortunately, any incorrect or incomplete information could lead to accusations by the MGA of material non-disclosure. Practices could find themselves paying way above the odds for PI cover simply because they are unjustly viewed as a bad risk.”
However, in practice, under the policy wording agreed to by the Law Society – which all qualifying insurers must adopt – it will be very difficult for any insurer to avoid a claim, even if non-disclosure is evident. The insurer must first pay the disputed claim. Then, according to the “Draft Minimum Terms” of qualifying policies, they may have recourse to make a recovery. If the insured “permits or condones a breach of the contract,” he must “reimburse the insurer to the extent that is just and equitable.”
The wording is vague and untested, and could lead to court challenges. As Coulson of Hammond Suddards says: “It would certainly be well worthwhile to look at the different insurers' approved wordings to see if they are offering anything different from that.”
But it seems unlikely that any qualifying insurer will be offering a cover broader than that required under the minimum terms. “The Law Society has obtained the widest possible wording of any profession for the members,” Naqvi of Hiscox says. “They have done a very good job.”
Hazards of the race
Faced by uncertain claims, a mass of enquiries in a short time, and egregious competition, qualifying insurer Independent Insurance has already decided it will not write any solicitors' primary PI this year. A spokesman said: “We do not feel that we would get a return from this sector over the next 12 months. There will be an awful lot of time wasted on business that won't come on board, so we prefer to focus our efforts on areas where we can get a better return.”
As the debate continues, few players have actually priced any of the business. “We are not going to start quoting until the beginning of the second week of July,” says Andrew Macpherson of the London brokerage Dickson Manchester Underwriting. “Some of the markets we will be using will not be ready, even by then. But it is a moveable feast.”
He sees rates falling as competition grows, with initial cherry picking followed by tough competition. However, he foresees a very difficult market for less attractive risks. And while almost all quarters are recommending early action, he says it may not pay for some clients. “If smaller firms get to the market early, they might not get the benefit of reducing rates throughout August,” he says. “I suspect the total premium will be a lot less than £200m.”
That premium, although a sizeable chunk of change, may ultimately cause a market meltdown that offsets the cash prize. Brokers' mailings have resulted in the perverse practice of many firms of solicitors appointing multiple intermediaries (one firm is known to have appointed a panel of five brokers).
“Most of us are fishing from the same pond,” Macpherson says. Even if each broker shops with only five of the qualifying insurers to fix their price, the result will be a chaotic nightmare of new business enquiries, which insurers will be unable to cope with. For SPIL, which promises a scientific but artistic and thoughtful underwriting process, it is difficult to imagine how it will be able to perform the task – even to its own satisfaction – for the entire solicitors' market in just two months.
Qualifying Insurers – June 2000
Ace Underwriting Agencies
Admiral Underwriting Agencies
R E Brown & Others
Cox Syndicate Management
A D Hicks/M H Wheeler Syndicate (SVB)
Hiscox Insurance Company
Independent Insurance Company
QBE International Insurance
Royal & SunAlliance
Saturn Professional Risks (for MMA Ins. )
SJ Burnhope Syndicate 1212 (SVB)
St Paul International Insurance
The Underwriter Insurance Company
Wren Syndicate Management