Changes to the size of the PII market – the need to be a good risk
The announcement by the Solicitors Regulation Authority (SRA) that it is to consult on only allowing rated insurers to provide professional indemnity (PII) cover to SRA-regulated law firms is an inevitable result of the problems experienced last year following the problems that were caused by the insolvency of a number of insurers. Coming, as it does, so soon after the announcement of the firms closing down through lack of PII cover and the review undertaken by Marsh into the gap in protection for clients, it is clear that PII issues are something that the SRA is taking very seriously and, could well lead to further steps being taken in relation to cover over the coming years.
The review that led to the consultation was in the main created by the problems experienced by those firms insured through the Latvian insurer Balva, although issues in other years such as the failure of Irish insurer Quinn which left around 2,900 solicitors uninsured and needing to obtain cover elsewhere, will have contributed. Added to this has been the removal of the Assigned Risks Pool (ARP) which led to the closure of those firms unable to obtain cover in the open market.
At the heart of the problem are concerns about the way clients are protected in the event of a firm’s failure. The initial findings by Marsh suggested that inconsistencies existed in the protection that clients received depending upon the insurer with whom their solicitor was insured. This, combined with what is described as the “ disorderly exit of several insurers from the market” has lead the SRA to conclude that “unrated insurers may pose a significant risk to client protections and to legal services and legal services regulation.”
With this in mind, the SRA Board has decided to “seek views on the proposed introduction of a minimum financial strength rating requirement in the ‘B’s as part of the criteria for an insurer to become a Participating Insurer for the purposes of our compulsory client financial protection arrangements.”
Common themes in failing insurers
The consultation has identified certain common themes in relation to the difficulties experienced over the past few years with unrated insurers such as Quinn, Lemma, Balva and Berliner. Those contributing factors have included one or more of the following:
- No financial strength rating
- No prior experience in writing solicitors PII either in England and Wales or elsewhere
- Little evidence of engagement with the Home State regulator regarding entry into the solicitor’s field
- Passported into the UK to write business based on Home State regulation
- Limited financial resources to deal with any adverse outcomes
- Outsourcing of the underwriting and administration of the business, and in some cases through a complex chain of authority
- Reliance on reinsurance to meet its obligations
- The underwriting of solicitors business in England and Wales threatening the insurer’s survival
- Apparent lack of engagement with Home State regulator on ambitious plans to grow the business by entering the solicitors market
- An absence of reliable data on which to base either a decision to enter the market or properly price the business or drive risk selection
- The need to be particularly price competitive given their unrated nature to achieve market share especially when they first enter the market
- A question as to whether there was a proper alignment of interests between the insurer and the outsourcing agent
- Achieved significant market share based upon ambitious growth targets.
If the consultation concludes, as it almost undoubtedly will, that only rated insurers are to be allowed to offer PII insurance in the solicitors market, then this could lead both to an increase in the cost of PII cover and a reduction in the availability of cover with insurers being far more choosy as to whom they are willing to insure.
Although Agnieszka Scott, SRA Director of Policy and Strategy has said the SRA’s “overriding objective is to ensure appropriate protection for consumers without driving unnecessary costs on law firms”, inevitably it is going to be place yet further pressure upon firms when the time for renewal comes around again.
Impact on availability and cost
The consultation acknowledges that there will be impacts both upon the availability and cost of insurance.
Whilst, the consultation states, existing insurers within the market should be able to absorb additional capacity, it is possible that “improved underwriting standards needed to obtain and retain minimum ratings could cause insurers to no longer provide insurance to some firms”. This it is suggested would be likely to be limited to “those firms with poor claims histories which are currently insured by unrated insurers who do not obtain the minimum rating.” However, it is not outside the bounds of possibility that many more firms than can be absorbed will be left in a position of having to fight for insurance if the capacity reduces too far, especially if previous insurers in this market do not choose to renter. Indeed, the consultation acknowledges that a greater impact may be felt “during periods of hard markets in the insurance sector (i.e. where capacity is reduced and prices rise generally)”.
So far as the impact on price is concerned, the SRA admit that they cannot “predict with any certainty the change in the price of insurance at the next renewal because the introduction of a rating requirement for insurers would be only one of a number of factors affecting price.”
Thus, factors such as expected level of claims , the relative attractiveness of the solicitors’ insurance market compared to other insurance markets and the dynamics of competition within the solicitors’ insurance market itself could all lead to changes in the cost. The consultation notes the fact that “on average unrated insurers offered prices around 15% lower than rated insurers in the 1-10 partner firms.”
It is a fairly safe assumption, therefore, to conclude that a move to using only rated insurers would lead to some price increase – even if it is not the full 15%. However, for a small firm struggling to make ends meet, even a 5% price increase could be the difference between success and failure.
It is almost certain, given the problems that have been experienced over the past few years, that steps will be taken to prevent unrated insurers from providing PII cover to SRA-regulated law firms. It fits in with the drive towards public protection and is an inevitable adjunct to the management of financial risk within the profession as a whole and individual firms.
That being the case, firms who do not take steps to make themselves more attractive to insurers are increasing the risk that they will fail to find PII cover in coming years and as a result go out of business.
All firms, whatever their size, have got to address issues of risk, claims history, viability, practice management, client care and financial stability if they are to continue to be viable as firms, but also if they are to remain attractive to insurers. They must also give thought to the type of work they do, their ability to manage that work adequately, the extent to which doing that work is contributing to making them an uninsurable or a less attractive prospect and what they can do make themselves appear less of a risk to the insurer.
Those firms who have struggled over the past few years to find insurance may now have only a few months to begin the process of becoming desirable.
If you believe that your firm’s insurance position is at risk in the future and you would like help in taking steps to make your firm a better insurance prospect then the Lawyers Defence Group can help.
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