More Insurers Please


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More Insurers Please

  1. 1. Insurance CAUT IO AR P N ! MORE INSURERS PLEASE! By Richard Hill, ILFM Vice ChairLet’s reminisce for a moment. Do you remember the days when a quick Insurers who jumped into the solicitors’ market ‘feet first’, when it firstphone call to your friendly bank manager was all that was needed to went to the open market, are now finding the water far too choppy andrequest some partner capital or to extend the overdraft, with little need are sailing towards calmer classes of business. Last year saw Quinnto produce financial information to back up the request? It may well going into administration, the withdrawal of Hiscox, Catlin and ACE,also be a distant memory that, in August each year, you would renew with many others only writing existing business or drastically reducingyour professional indemnity insurance (PII) with a quick chat with your their scope. This year we have already seen the exit of SIMA, thebroker, sometimes there was even the odd discount thrown in for good Solicitors Indemnity Mutual Insurance Association.behaviour (no claims), and that was that. Many solicitors thought theassigned risks pool (ARP) was an over zealous health and safetynotice at the local swimming pool! There have been 15 years ofprosperity and economic growth where legal work was in abundance. State of the marketConveyancing transactions were flowing with the property boom andlegal aid had its biggest ever budget. Insurers were underwriting most Deterioration in claimslaw firms despite their credibility and risk profile, as the solicitors’ • ½ claims are property and ½ of those are lender claimsbusiness was seen as sound due to the low claims frequency and high • Fraud and dishonesty claimslevel of capacity. Not anymore. The ARP is common knowledge and • Recessionary claimsnow firms, particularly the small to medium practices, realise theinfluence that banks and insurers, as stakeholders, have in their High Court statistics for negligence claims againstbusiness in today’s environment. Banks now require regular solicitorsmanagement accounts reporting as a ‘health check’ on the practice’s • 2009 – 210finances and liquidity, as banks themselves are under immensepressure to write good sound business, as they look to stabilise their • 2008 – 80balance sheets. • 2004 – 12So let’s now concentrate on professional indemnity insurance. Insurers Premium ratesare the providers of one of your biggest overheads and, in some cases, • 1 – 3 partners highest ratescan determine whether you carry on trading. Like the banks, insurers • 4 – 5 partners 2nd highestalso have their own legislative regime occupying their minds. In • 6-10 partners highest rate increasesJanuary 2013, Solvency II comes into play which is aimed at making • 11-25 partners 2nd lowest increases and premiumssure insurers have adequate capital and risk management standards in • 26 partners or more enjoy the lowest rates of allplace to avoid a Northern Rock (and the other banking disasters ofrecent months) from occurring in the Insurance industry.This year, insurers were hit with extreme weather damage; the WHat CauSeD tHe exoDuS of inSurerS?Japanese earthquake was the most expensive (est. $35bn liability for There are two overriding factors for the exit of insurers from the market,insurers) natural disaster ever; the Euro sovereign debt crisis; and and the lack of appetite for underwriting solicitors that has caused suchrising fraud. So it’s no surprise that insurers have had many decisions a hardened market – the assigned risks Pool (arP) and make when identifying business areas and products to underwrite.18 • September/October 2011 LEGAL ABACUS
  2. 2. Insurance1. arPAny firm that cannot gain cover in the open market due to poor claimsrecords enters the ARP. The premium is 27% of income and it isestimated that only 3% of ARP firms survive. The problem is clear fromfigures 1 & 2. There has been a rapid increase in firms entering withpremiums not being paid and claims paid are reaching into millions.Insurers currently pay into the ARP relative to their market share. Thecost of ARP for 2008 is set at a staggering £55m (800% loss ratio)which provides no incentive for new market entrants to compete forsolicitors’ business having to pay a “subsidy” to the ARP. This year,qualifying insurers will have to pay £38.6m to fund the ARP. TheCharles Rivers report (commissioned on behalf of the SRA) referred tothe cost of the ARP as a “perverse disincentive” to writing solicitors PIbusiness. Although, let’s not forget, it is the professional that ultimatelypays as insurers pass the costs onto solicitors anyway with 10-16% of figure 1the premium going to the ARP. Even so, the predicament has led toallegations of insurers using mitigation strategies (sometimes known as“flipping”) by under declaring their premiums/business underwritten tolower their % contribution. Between 2007 & 2009 the total premium potfor solicitors increased by 20% to an all-time high of £245 million. Atthe last renewal the declared premium suddenly dropped to £220million and commentators believe the true figure to be in the region of£260m due to these mitigation strategies.Put simply, well run firms should not subsidise weaker firms. The ARPis a hospital for dying firms and it’s not fit for purpose. After the last renewal nearly 90% of the market is in the hands of just 8 qualifying insurers. 1. Chartis 2. Inter Hannover figure 2 3. XL 4. Zurich solicitors indemnity fund (SIF) equivalent is estimated at £557 million! 5. Travellers Going back even further in time, the master policy would have cost an 6. QBE estimated £412 million for 2008. Eye opening figures when you 7. Allianz consider the open market is estimated to have saved the legal 8. Aviva profession £2.1 billion! The market can only be improved with the Remaining 10% is insured by 12 insurers abolishment of the ARP which should encourage new entrants and therefore increase competition and choice.2.Claims Sra Consultation and changesThe biggest contributors of claims come from residential conveyancing, The SRA, realising the necessity for change, carried out a consultationtrust and probate, personal injury and litigious matters. But, winning the on PII with the profession, and were advised by Charles Riversunwanted accolade of top contributor by some distance, is residential Associates (CRA). Here is a timeline of the proposed changes.conveyancing as it accounts for half of all claims. With the propertycrash people want someone to blame. Nearly half of all the property 2011 – 2012claims are in relation to lenders, most notably the buy-to let market and Firms will still enter the ARP if unable to obtain cover but will only befrom subprime lenders. High loan-to-value ratio mortgages are able do so for 6 months (reduced from 12 months].extremely risky when the market declines and the incredibly onerousobligations placed on solicitors (mainly parts 1 & 2 of the Council of Removing the liability on qualifying insurers to meet the ARP liabilitiesMortgage Lenders Handbook) can lead to a slip up. of any other qualifying insurer becoming insolvent.A number of recent high-profile mortgage fraud cases have highlighted 2012 – 2013the final financial impact of mortgage fraud for lenders and The ARP will still be around but to lessen the blow for insurers, thehomeowners. SRA have committed the profession to paying £30m of the first £50m of the ARP. This will partly be met with the surplus remaining in theThe long tail back nature of conveyancing claims is the real fly in the Solicitors Indemnity Fund (SIF) and that will cover the first £10m. Itointment for insurers. There is a general consensus that although the remains to be seen that if the further £20m become liable, whetherfrequency and severity of claims are better than this time last year, there would a levy on the profession to cover this?there are still a large number of claims waiting to pop their nasty headsout of the woodwork. As Warren Buffet said “It is only when the tide 2013 – 2014goes out do you discover whos been swimming naked” The time has come that many insurers have been calling for - ARP to be abolished! But what happens to firms that cannot sweet talk theirPII policies are also on a “claims made” basis i.e. it is when the claim is brokers to provide cover? The ARP will be replaced with a systemreported rather than when the alleged offence took place. In general a where the current insurer offers a three-month extended policy for firmsPII claim takes on average 6-8 years to resolve which shows the who cannot obtain cover the following year. After 2 months the firmsresources that can potentially be consumed. will have to wind/close down. For SRA guidance go to WHat iS being Done about it? some firms have been murmuring about whether we shouldcontinue insuring firms in the open market or shift back to the solicitors’ The exclusion of claims made by financial institutions in 2011 and non-indemnity fund. However, I dont agree with this. Generally speaking individual client in 2012 have at the moment been scrapped. A reviewthe open market has produced the best results for most solicitors with of the regulation of conveyancing is to take place this year and thesea smaller percentage of income going on PII than SIF. As an example permitted exclusions will be reconsidered for 2014.the actual cost of the open market was £226 million in 2008. The LEGAL ABACUS September/October 2011 • 19
  3. 3. InsuranceFrom 2013, the SRA will again consult the profession and insurers on Conveyancing Quality Scheme – improving standards inremoving the single renewal date, assessing the pros and cons. conveyancing The Conveyancing Quality Scheme was launched by the Law SocietyConveyanCing this year to provide a quality standard for residential conveyancingAs mentioned above, it is well documented and publicised that practices. The standard will look to improve conveyancing procedureconveyancing is the real thorn in the side for underwriters. Some and service. The Council of Mortgage Lenders (CML), Buildingsolicitors have in turn swapped regulators by moving under the Council Societies Association and Association of British Insurers are all said toof Licensed Conveyancers (CLC) regime who arrange their be backing the initiative and offered specialist advice and guidance forprofessional indemnity insurance through the CLC scheme. Some firms the scheme framework. The aim is surely to enhance the reputation ofhave shipped their conveyancing business into a separate regulated conveyancing solicitors in the conveyancing community and two veryvehicle. Larger firms have reduced their exposure to Real important stakeholders, lenders and indemnity insurers.Estate/Property or have seen confrontation from other departments aspartners are not happy with the added pressure a Real Estate At the last count this month over 1000 firms had applied for the CQSdepartment brings. scheme with 320 being accepted. Let’s hope the CQS is a Standard with substance, improves the conveyancing process and it is not justUndertakings are another significant issue in conveyancing. The another tick box approach. So many conveyancing claims are not thesolicitors promise to ‘undertake’ an action can create an unlimited result of poor knowledge of the law but administrative or procedurefinancial liability and exposure to loss. Insurers are covering these errors, such as a failure to undertake searches or delays in registrationpromises with no limits. As mentioned earlier in this article, banks and of titles or charges.insurers have solvency capital requirements and I wonder whether asolicitor, armed with an undertaking, could one day start calls for With conveyancing firms being under pressure from all angles - the cullsolicitor firms to have solvency capital requirements as a provision for of law firms from the lenders panels, enhanced money launderingthese potential liabilities. checks due to high risk label, demand for legal services shrinking and the added threat of the ‘brands’ entering the high street to add to theA review of the conveyancing process is underway with the SRA ones already mentioned – I hope the CQS will help in some way todrafting the supervision and enforcement strategy for conveyancing in reinstall confidence back in the market.order to get the ball rolling, after advice from the Hopefully, we should have enough time CloSure, Merger or inSolvenCybefore the next property dip as it can be argued that the property cycle With the consolidation of the fragmented legal market and therepeats itself every 18 years (14 years up then 4 years down) with the recession sieving out many weak firms, we have seen closures, firmssolicitors insurance arrangements coming under the same scrutiny shut down through the ARP, bankruptcy orders and mergers. There iseach time. We must create an insurance scheme robust enough to no doubt this will continue but this triggers two obligations - run offweather downturns in economic and property markets. cover and the Successor Practice Rules. With the abolishment of the ARP and the need for orderly closures of practices, this will become aSo what is being offered to help in the meantime? future topic of discussion.Home Owners Protection Policy (HOPP) – diverting risk to other run off coverinsurance products. When a firm ceases trading and there is no successor practice theFirst Title in association with AON Corporation have launched the principals are obliged to pay for run off cover for 6 years to pick up anyHome Owners Protection Policy (HOPP). For homebuyers and lenders, future claims by clients. The premium is on average 220-250% of thethe HOPP is an insurance policy that protects and covers a wide range last year’s premium.of risks they may encounter in the course of buying, mortgaging orusing a residential property. This includes risks that even the most Successor Practice rulesdiligent solicitor cannot prevent, such as forgery, identity theft, fraud, Insolvent firms can put up for sale their client portfolio to settlemisrepresentation by a seller, boundary disputes, and lack of planning creditors. Yet there is one hurdle that firms need to carefully considerpermissions and building regulation consents for previous alterations. as business acquisitions are not as easy in the solicitors’ world. FirmsFor conveyancing solicitors, the HOPP has been promoted as the best will be labelled as a “successor practice” lumbering them with liabilitiespossible risk management solution for clients and lenders. It offers and responsibilities created by the regulatory complexities of closinggreater protection to a client than Professional Indemnity Insurance down a firm. As an example, a client can make a claim against the firm(PII), and allows consumers to claim on a no fault policy, therefore for a negligent act performed by the previous firm. This is yet anotherremoving the need for a client to bring a negligence claim at their own hurdle which is very relevant in today’s climate of insolvencies andexpense. surely there should be a solution where these liabilities can be ring- fenced as an option to attract a buyer.Put simply, HOPP is intended to have a twofold purpose, to protectconsumers (and lenders) from risks that are impossible or difficult to ConCluSionidentify or solve during the conveyancing process and to create Insurers have reacted and expressed their disappointment at the SRAstability in the conveyancing market, in terms of PII premiums and changes. The ABI (Association of British Insurers) said “the changespredictability of claims. were a missed opportunity for the long overdue reform which is so badly needed. It is hugely disappointing that they have behaved soThe concept of transferring risk from PII to a legal indemnity product timidly considering the advice they received from their advisors,sounds wonderful in theory but in practice may be a different outcome. Charles River Associates, last autumn – that immediate and far-First of all, who pays for the policy? When a home buyer has already reaching change was needed”.paid out for stamp duty, estate agents fees, searches, a mortgage etc,will they be willing to spend another few hundred pounds on this Whether you agree with the swiftness of SRA’s approach it is importantinsurance policy when they expect their conveyancing solicitor to not to forget that insurers have their own agenda. Underwriters areproperly advise them. More realistic would be the sharing of costs with under growing pressure to achieve a turnaround in profits on theirlenders, solicitors and homebuyers. There will need to be a clear solicitors’ portfolio due to poor recent performance. Insurers haveexplanation as there is a real consumer blind spot about the subject suggested the industry is probably £80-100 million short of where itand, after all, it is their biggest financial commitment. should be, which has many insurers touting premium increases needed to make the market more stable in the long term. Underwriters willThat is not to say it has never worked. In 1995, against a backdrop of assess firms more commercially and look for profitable legal portfolios,economic instability and huge premium spikes in the PI market, the but if the market sees the arrival of new entrants how will insurers reactsame concept was introduced in Canada. By 2001, the base premium, to the added competition? We have already witnessed in the 2010for a sole practitioner with a CAN$10,000 excess, early lump sum renewal new US giant XL insurance gain market share with verypremium payment and early filing of PII application, had halved and competitive pricing through their exclusive scheme with AON. Then lasthas remained stable ever since. year, Hanover Re (through Lockton brokers) carried out a penetrative pricing policy to pick up a large order book.20 • September/October 2011 LEGAL ABACUS
  4. 4. InsuranceSo whilst the SRA, insurers and the profession seek to implement a • Do not instruct many different brokers to go to the open market asfairer and less volatile PII system, where stronger firms do not shore up your proposal form will keeping landing on the underwriters desk andthe weaker firms and firms are individually underwritten based on just they will not offer favourable terms.their own claims experience, we still have this year’s renewal and I • Provide your own views on claims and circumstances notifiedthink it is fair to say the next 2/3 years will still be a challenging market • Explain remedial action taken to prevent recurrence and any trends infor both solicitors and insurers. your claims (areas of work, individual etc). • If you have a good claims record calculate your premium to claimWhat to do for this renewal? ratio.Insurers will monitor and evaluate risk more forensically than ever and • Request your broker to compare your firm with industry selective in their underwriting. • Do not leave until last minute to try and get better deal as higher risk of entering ARP.• Meet to discuss the PII renewal and get their advice on how to • Ensure finance in place as insurers will not ‘hold cover’ without present your firm. cleared funds.• Treat your proposal form as a tender for work. Present well, error free • Ensure you understand the new Outcome Focussed Regulations and structure properly. coming in on 6th October and the added focus on supervision and• Review other brokers that have exclusive deals that your broker or risk management that will be top of the agenda for underwriters. other brokers don’t have access to (e.g. AON exclusive arrangement • Don’t be surprised if brokers request a set of accounts, business plan to approach QBE and XL insurance). and cash on balance sheet. INSURERS’ QUESTION TIME We have mentioned two of the major influences over the few years, The possible removal of the single renewal date will be ARP and claims. The other is Alternative Business Structures. One consulted in 2013 so we asked Peter Cattrall at Carroll interesting structure created by the Legal Services Act 2007 are Multi- Insurance - Do you think it would be beneficial to remove Disciplinary Practices where solicitors can go into business with other the single renewal date? professionals. Will insurers create specialist insurance products to cover these firms with different industry insurance obligations? The There are three major problems with solicitors professional MTC for solicitors in England and Wales provides the widest cover indemnity insurance free market ("SPI") mechanics which need available in the world. We asked Eliott Lake at Lockton - Will you sorting - first, the disastrously unwieldy ARP; second, the bring out an insurance product for Multi Disciplinary Practices? uniquely commercially unreasonable Minimum Terms & third, the unrepresentative nature of the market for smaller practices “The SRA are not presently looking to regulate non legal services which still comprise the majority of 11,000 practising firms. carried out by Multi Disciplinary Practices (MDPs). We envisage that an MDP will have different professional indemnity covers in place for “There has been a single renewal date since SIF days pre their separately regulated arms. This will either be accommodated 2000. The date was 1st September but shifted to 1st October within a combined Multi section policy that meets the minimum terms in 2004 (not without difficulty). A single renewal date focuses as set down by each Regulator or separate policies designated for minds, creates a level playing field, concentrates each regulated business. Insurers are not at present launching any administrative effort & enables the proper workings of the new products to cover MDPs, however Lockton will be working with their clients who intend to become MDPs to tailor the professional annual regulatory cycle. Rolling renewals would create more indemnity wordings to meet their diversified business structure.” problems, different commercial markets & the likelihood of competitive unfairness. The annual renewal season (with its single renewal date) is demanding. But the market is dynamic, the same for everybody & has stood the test of time. Removing the single date is unnecessary tinkering. I/we support its retention.” Again another question on the Legal Services Act 2007 and the opening of the legal market door to non lawyers brought on by the Act. We asked Martin Ellis, MD of Prime Risk Solutions - How do underwriters/brokers envisage the risk of non lawyer influence in future legal practices? As mentioned First Title in association with AON have launched “It is difficult at this stage to predict with any certainty the risk impact of the Home Owners Protection Policy. We asked Nick Skey at non lawyer influence on legal practices in the future. I would however, AON - Do you think there is a realistic opportunity for the state with some degree of certainty that the legal services regulators, Home owners Protection Policy to work in the uK? the SRA, the CLC or others will ensure with vigour that those businesses falling into this category adhere to a robust compliance “Conveyancing claims make up around 40% of all PI claims and culture. Professional Indemnity Insurers will need to fully understand the main reason the PI market is in such a bad state. This who the non lawyers are, their experience of management, the product genuinely transfers risk away from a solicitors PI policy. business case behind such evolution and importantly the risk Logically PI claims will reduce and this, depending on market assessments undertaken. It is fair to say that for some firms, individual conditions, should be reflected in premiums. When it was non lawyers have been in senior management position for many launched in the Canadian market it achieved penetration of 90% years. In my opinion, significant influence on the management of risk of conveyances within 5 years and had the effect of reducing PI and compliance in many firms who resemble corporate structures in terms of roles, responsibility, accountability and in general governance costs by more than 40% and the cost has remained stable ever of regulatory obligation.” since.” LEGAL ABACUS September/October 2011 • 21