1. Insurance
CAUT
IO
AR P N
!
MORE INSURERS
PLEASE!
By Richard Hill, ILFM Vice Chair
Let’s reminisce for a moment. Do you remember the days when a quick Insurers who jumped into the solicitors’ market ‘feet first’, when it first
phone 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 and
request some partner capital or to extend the overdraft, with little need are sailing towards calmer classes of business. Last year saw Quinn
to 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 reducing
your professional indemnity insurance (PII) with a quick chat with your their scope. This year we have already seen the exit of SIMA, the
broker, 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 the
assigned risks pool (ARP) was an over zealous health and safety
notice at the local swimming pool! There have been 15 years of
prosperity and economic growth where legal work was in abundance. State of the market
Conveyancing transactions were flowing with the property boom and
legal aid had its biggest ever budget. Insurers were underwriting most Deterioration in claims
law firms despite their credibility and risk profile, as the solicitors’ • ½ claims are property and ½ of those are lender claims
business was seen as sound due to the low claims frequency and high • Fraud and dishonesty claims
level of capacity. Not anymore. The ARP is common knowledge and • Recessionary claims
now firms, particularly the small to medium practices, realise the
influence that banks and insurers, as stakeholders, have in their High Court statistics for negligence claims against
business in today’s environment. Banks now require regular
solicitors
management accounts reporting as a ‘health check’ on the practice’s
• 2009 – 210
finances and liquidity, as banks themselves are under immense
pressure to write good sound business, as they look to stabilise their
• 2008 – 80
balance sheets. • 2004 – 12
So let’s now concentrate on professional indemnity insurance. Insurers Premium rates
are the providers of one of your biggest overheads and, in some cases, • 1 – 3 partners highest rates
can determine whether you carry on trading. Like the banks, insurers • 4 – 5 partners 2nd highest
also have their own legislative regime occupying their minds. In • 6-10 partners highest rate increases
January 2013, Solvency II comes into play which is aimed at making • 11-25 partners 2nd lowest increases and premiums
sure insurers have adequate capital and risk management standards in • 26 partners or more enjoy the lowest rates of all
place to avoid a Northern Rock (and the other banking disasters of
recent 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 such
rising fraud. So it’s no surprise that insurers have had many decisions a hardened market – the assigned risks Pool (arP) and claims.
to make when identifying business areas and products to underwrite.
18 • September/October 2011 LEGAL ABACUS

2. Insurance
1. arP
Any firm that cannot gain cover in the open market due to poor claims
records enters the ARP. The premium is 27% of income and it is
estimated that only 3% of ARP firms survive. The problem is clear from
figures 1 & 2. There has been a rapid increase in firms entering with
premiums not being paid and claims paid are reaching into millions.
Insurers currently pay into the ARP relative to their market share. The
cost of ARP for 2008 is set at a staggering £55m (800% loss ratio)
which provides no incentive for new market entrants to compete for
solicitors’ business having to pay a “subsidy” to the ARP. This year,
qualifying insurers will have to pay £38.6m to fund the ARP. The
Charles Rivers report (commissioned on behalf of the SRA) referred to
the cost of the ARP as a “perverse disincentive” to writing solicitors PI
business. Although, let’s not forget, it is the professional that ultimately
pays as insurers pass the costs onto solicitors anyway with 10-16% of
figure 1
the premium going to the ARP. Even so, the predicament has led to
allegations of insurers using mitigation strategies (sometimes known as
“flipping”) by under declaring their premiums/business underwritten to
lower their % contribution. Between 2007 & 2009 the total premium pot
for solicitors increased by 20% to an all-time high of £245 million. At
the last renewal the declared premium suddenly dropped to £220
million 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 ARP
is 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 changes
The biggest contributors of claims come from residential conveyancing, The SRA, realising the necessity for change, carried out a consultation
trust and probate, personal injury and litigious matters. But, winning the on PII with the profession, and were advised by Charles Rivers
unwanted 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 property
crash people want someone to blame. Nearly half of all the property 2011 – 2012
claims 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 be
from 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 onerous
obligations placed on solicitors (mainly parts 1 & 2 of the Council of Removing the liability on qualifying insurers to meet the ARP liabilities
Mortgage 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 – 2013
the final financial impact of mortgage fraud for lenders and The ARP will still be around but to lessen the blow for insurers, the
homeowners. 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 the
The long tail back nature of conveyancing claims is the real fly in the Solicitors Indemnity Fund (SIF) and that will cover the first £10m. It
ointment for insurers. There is a general consensus that although the remains to be seen that if the further £20m become liable, whether
frequency 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 heads
out of the woodwork. As Warren Buffet said “It is only when the tide 2013 – 2014
goes out do you discover who's 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 their
PII 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 system
reported rather than when the alleged offence took place. In general a where the current insurer offers a three-month extended policy for firms
PII claim takes on average 6-8 years to resolve which shows the who cannot obtain cover the following year. After 2 months the firms
resources that can potentially be consumed. will have to wind/close down. For SRA guidance go to
http://www.sra.org.uk/solicitors/code-of-conduct/guidance/Closing-
So WHat iS being Done about it? down-your-practice.page.
Already some firms have been murmuring about whether we should
continue 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 don't agree with this. Generally speaking individual client in 2012 have at the moment been scrapped. A review
the open market has produced the best results for most solicitors with of the regulation of conveyancing is to take place this year and these
a 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. Insurance
From 2013, the SRA will again consult the profession and insurers on Conveyancing Quality Scheme – improving standards in
removing the single renewal date, assessing the pros and cons. conveyancing
The Conveyancing Quality Scheme was launched by the Law Society
ConveyanCing this year to provide a quality standard for residential conveyancing
As mentioned above, it is well documented and publicised that practices. The standard will look to improve conveyancing procedure
conveyancing is the real thorn in the side for underwriters. Some and service. The Council of Mortgage Lenders (CML), Building
solicitors have in turn swapped regulators by moving under the Council Societies Association and Association of British Insurers are all said to
of Licensed Conveyancers (CLC) regime who arrange their be backing the initiative and offered specialist advice and guidance for
professional indemnity insurance through the CLC scheme. Some firms the scheme framework. The aim is surely to enhance the reputation of
have shipped their conveyancing business into a separate regulated conveyancing solicitors in the conveyancing community and two very
vehicle. Larger firms have reduced their exposure to Real important stakeholders, lenders and indemnity insurers.
Estate/Property or have seen confrontation from other departments as
partners are not happy with the added pressure a Real Estate At the last count this month over 1000 firms had applied for the CQS
department brings. scheme with 320 being accepted. Let’s hope the CQS is a Standard
with substance, improves the conveyancing process and it is not just
Undertakings are another significant issue in conveyancing. The another tick box approach. So many conveyancing claims are not the
solicitors promise to ‘undertake’ an action can create an unlimited result of poor knowledge of the law but administrative or procedure
financial liability and exposure to loss. Insurers are covering these errors, such as a failure to undertake searches or delays in registration
promises with no limits. As mentioned earlier in this article, banks and of titles or charges.
insurers have solvency capital requirements and I wonder whether a
solicitor, armed with an undertaking, could one day start calls for With conveyancing firms being under pressure from all angles - the cull
solicitor firms to have solvency capital requirements as a provision for of law firms from the lenders panels, enhanced money laundering
these 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 the
A review of the conveyancing process is underway with the SRA ones already mentioned – I hope the CQS will help in some way to
drafting the supervision and enforcement strategy for conveyancing in reinstall confidence back in the market.
order to get the ball rolling, after advice from the CRA.
www.sra.org.uk/conveyancing/. Hopefully, we should have enough time CloSure, Merger or inSolvenCy
before the next property dip as it can be argued that the property cycle With the consolidation of the fragmented legal market and the
repeats itself every 18 years (14 years up then 4 years down) with the recession sieving out many weak firms, we have seen closures, firms
solicitors insurance arrangements coming under the same scrutiny shut down through the ARP, bankruptcy orders and mergers. There is
each time. We must create an insurance scheme robust enough to no doubt this will continue but this triggers two obligations - run off
weather 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 a
So what is being offered to help in the meantime? future topic of discussion.
Home Owners Protection Policy (HOPP) – diverting risk to other run off cover
insurance products. When a firm ceases trading and there is no successor practice the
First Title in association with AON Corporation have launched the principals are obliged to pay for run off cover for 6 years to pick up any
Home Owners Protection Policy (HOPP). For homebuyers and lenders, future claims by clients. The premium is on average 220-250% of the
the 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 or
using a residential property. This includes risks that even the most Successor Practice rules
diligent solicitor cannot prevent, such as forgery, identity theft, fraud, Insolvent firms can put up for sale their client portfolio to settle
misrepresentation by a seller, boundary disputes, and lack of planning creditors. Yet there is one hurdle that firms need to carefully consider
permissions and building regulation consents for previous alterations. as business acquisitions are not as easy in the solicitors’ world. Firms
For conveyancing solicitors, the HOPP has been promoted as the best will be labelled as a “successor practice” lumbering them with liabilities
possible risk management solution for clients and lenders. It offers and responsibilities created by the regulatory complexities of closing
greater 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 another
removing the need for a client to bring a negligence claim at their own hurdle which is very relevant in today’s climate of insolvencies and
expense. 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 protect
consumers (and lenders) from risks that are impossible or difficult to ConCluSion
identify or solve during the conveyancing process and to create Insurers have reacted and expressed their disappointment at the SRA
stability in the conveyancing market, in terms of PII premiums and changes. The ABI (Association of British Insurers) said “the changes
predictability of claims. were a missed opportunity for the long overdue reform which is so
badly needed. It is hugely disappointing that they have behaved so
The 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 important
insurance policy when they expect their conveyancing solicitor to not to forget that insurers have their own agenda. Underwriters are
properly advise them. More realistic would be the sharing of costs with under growing pressure to achieve a turnaround in profits on their
lenders, solicitors and homebuyers. There will need to be a clear solicitors’ portfolio due to poor recent performance. Insurers have
explanation as there is a real consumer blind spot about the subject suggested the industry is probably £80-100 million short of where it
and, 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 will
That 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 react
same concept was introduced in Canada. By 2001, the base premium, to the added competition? We have already witnessed in the 2010
for a sole practitioner with a CAN$10,000 excess, early lump sum renewal new US giant XL insurance gain market share with very
premium payment and early filing of PII application, had halved and competitive pricing through their exclusive scheme with AON. Then last
has 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. Insurance
So whilst the SRA, insurers and the profession seek to implement a • Do not instruct many different brokers to go to the open market as
fairer and less volatile PII system, where stronger firms do not shore up your proposal form will keeping landing on the underwriters desk and
the 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 notified
think 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 in
for both solicitors and insurers. your claims (areas of work, individual etc).
• If you have a good claims record calculate your premium to claim
What 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 benchmarks.
be 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 (MDP's). 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 MDP's, however Lockton will be working with
their clients who intend to become MDP's 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
www.lockton.com/Services-and-Solutions/Professional-indemnity 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.”
www.carrollinsurance.co.uk
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 solicitor's 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.”
www.primeprofessions.co.uk www.rewritinginsurance.aon.co.uk/solicitors.aspx
LEGAL ABACUS September/October 2011 • 21