The SRA and PII – Consulting Adults?
Back in May this year, on the same day as one Solicitors Regulation Authority (SRA) consultation was concluded without action, another four consultations were announced. Whilst the withdrawn (for now) proposal to ban unrated insurers from the solicitor Professional Indemnity Insurance (PII) market would undoubtedly have made life more difficult for some (if not, many) of the solicitor profession, the five proposals contained within new ‘Consultation 4’ had been put forward with a view to help ease the pressure on this process. With the renewal date for the majority of firms drawing ever closer, the SRA has decided to proceed with just two of these proposals and submitted these on the 15th July to the Legal Services Board (LSB) for ratification which the SRA hope to have achieved by 1st October. With pressure building on the LSB to deny these changes, it remains to be seen whether the SRA’s revised proposals will be passed fit for renewal purpose. Many outside of the SRA are concerned that these changes will not create the hoped for premium reductions and actually may lead to higher costs for those wishing to keep the present level of cover. Worse still, it could lead to solicitor practices being under-insured causing a loss of consumer protection and a loss of protection for the firms themselves and those who work in them. So, how have we arrived at this position?
Unrated insurers to be allowed to continue to write solicitor PII for 2014.
Last year, the unrated Balva/Berliner debacle resulted in up to 1,300 firms finding out in September that, despite previous assurances to the contrary, they now had fewer than four weeks to find a new insurer. This coupled with the previous solvency issues of unrated Lemma and Quinn (and now ERIC) led the SRA to announce plans in January 2014 to consult on allowing only rated insurers to provide solicitors with PII from their 2014 renewal date. At the outset of the consultation period, it was hoped that the majority of those practices currently insured with unrated carriers (around 2,500) would find that come renewal, their insurer would have achieved the proposed rated status, thereby greatly mitigating any difficulties that might have occurred from the ban being effected and the resultant loss of insurance capacity. During the consultation period, these hopes faded and the Law Society began to ring alarm bells about the severe effect that the proposed ban would have on the viability of their membership, especially the smaller firms and those from black and ethnic minority and female-led firms.
The SRA has decided that, for now, they will not proceed with a ban but will keep this under review and therefore it would appear that solicitors can continue to choose to place their PII with unrated insurers at this year’s renewal. No doubt this decision has been met with a huge sigh of relief in certain quarters, but the concerns that brought about the need for the consultation remain undiminished. Whilst it is true that even the highest rating does not guarantee the unlimited future financial solvency of an insurer, it does mean that an accredited rating agency is continually looking through their books to ensure that they justify their rating. You do not gain the same insight when placing your business with unrated insurers and the quality of their balance sheets or available reinsurance (if they have any) could vary greatly. Your PII should be there to provide protection against long-tail liabilities (including six years run-off if required) and if your insurer is not financially robust enough to provide cover when you need it, this could leave your practice and your partners exposed to significant additional costs.
It is possible to see the use of unrated insurers to be like a drug to the solicitor profession. Now that it is being used by almost a quarter of all solicitor practices (mainly smaller firms with less than four partners), it is difficult to remove its availability without causing major withdrawal symptoms, possibly resulting in the demise of some firms. There now seems to be two possible solutions: Go ‘cold turkey’ as per the SRA’s original proposal, leaving their current Minimum Terms and Conditions (MT&Cs) in force and accept that some will face increased costs and some will not be able to get cover going forward: or water down the MT&Cs and attempt to increase the availability of rated capacity to make up for the effect of removing unrated capacity. For now, the ‘cold turkey’ option has been put to one side and the SRA’s latest proposals could be seen as attempting to pave the way for the latter option.
SRA ‘Consultation 4’ Proportionate Regulation — changes to minimum compulsory Professional Indemnity cover.
On the 7th May, the SRA announced a new consultation regarding possible changes to the MT&Cs and invited industry responses by 18th June. From an outside perspective, this could appear to have been ‘Plan B’ hastily coming into effect following the realisation that ‘Plan A’ would be too painful to proceed with. As referred to above, ‘Plan A’ could be seen as the banning of unrated insurers whilst maintaining the same onerous cover requirements of the current MT&Cs and hoping that there would be enough rated capacity to go round come 1st October. This was beginning to look increasingly unlikely and a ‘Plan B’ was required. The hope of the new consultation, should the proposals come into effect, is that this will be seen by rated insurers as going towards balancing the playing field, making solicitors a more attractive write. If more rated capacity can be drawn in then this will create greater competition and choice for solicitor PII buyers, making cover more accessible and affordable.
The PII market has been crying out for change to the MT&Cs for a long time now, regardless of the unrated issue. Many insurers feel that they are too onerous and prevent the possibility of allowing proper underwriting to take place and thereby making this business unprofitable. A major bone of contention was the Assigned Risk Pool and this has already been disbanded. Other issues previously raised have been removal of cover for claims by financial institutions, cover to only be provided where the premium has been paid and cover to be reconsidered where there has been deliberate non-disclosure. There were five proposals contained within the new consultation as follows:
- Reduce the level of mandatory PII cover to £500,000.
- Introduce an aggregate limit on claims.
- Require compulsory cover only for claims by individuals, small and medium-sized enterprises, trusts and charities.
- Reduce run off cover to a minimum of three years.
- Require firms to assess the level of cover appropriate to their firm beyond the minimum..
The SRA’s Conclusion.
By July, following their consultation, the SRA decided that they wanted to proceed with just two of the above proposals — to reduce the minimum limit to £500,000 but to require firms to assess the level of cover appropriate to their firm beyond the minimum. It is understood that the SRA reached its decision after obtaining informal indications that the cost of insurance might be reduced by 5-15 per cent and that this would benefit customers requiring legal services. The PII market has not got much time to react to these changes and it is possible that different insurers will react in different ways. The price is one thing but the resultant level of cover being provided is perhaps more important. For instance, if you decide that you still want the same limit as you had before, will the MT&C coverage now be reduced to £500,000 with less wide excess layer coverage being applied above this. This could be particularly important to any firm that needs to avail themselves of run-off insurance.
The questions now are:
- Will these changes be wide enough to make a significant difference, either in reducing costs or drawing in new rated insurers?
- Will any cost savings be passed onto or benefit customers?
- Will/should insureds want to accept the lower level of cover?
- Will buyers of solicitor services allow their legal services providers to take lesser cover?
- Should they wish to, will insureds still be able to buy the previous level of cover as they did before and will costs be similar to last year?
- How will Participating Insurers apply these changes and will insureds have chance to understand their new exposure?
- Will insurers and insureds be able to adapt and make suitable arrangements in time prior to 1st October 2014?
The most pressing question is, will the LSB allow these proposals to proceed? The adults involved in these consultations are perhaps best reminded of the old saying ‘marry in haste, repent at your leisure’.
For more information, contact Neil Pointon of PI brokers Howden Windsor at [email protected]