Say what you think
The Solicitors Regulation Authority’s soon to be issued consultation could have a huge impact in the event of a claim. Howden encourages all law firms to make their thoughts known
As I write this, the April 2017 solicitors’ renewal season is hull-down on the horizon. The October renewal is still fresh in the mind, and we’re considering factors that can help with decision-making for the next major round. In the meantime, it may be interesting
to revisit the following…
The Solicitors Regulation Authority (SRA) recently published 40 pages of claims data collected from insurers active in the market, as well as from “other sources” – understood to include the now-defunct Assigned Risks Pool – but not the unrated insurers who may have been driven out of business partly by the magnitude of solicitor claims against them. Setting aside concerns that the data may not truly reflect the overall experience, these figures will form the basis of a new SRA consultation intended to “create a more flexible way for firms to provide adequate and appropriate [PII] cover without spending more on premiums than is really necessary.”1
Here’s another SRA announcement. It’s specifically about run-off cover, but could apply to any other change to be considered: “To achieve a reduction in premiums, it would be necessary to reduce the period of run-off cover such that it excluded enough claims to make a difference to premiums. This in turn would leave some consumers unprotected”.2
Pot luck
Are these contradictory statements? At the least, there’s implied recognition that the total amount paid into the pot (whether as insurance premiums, contributions to a mutual, or shares of the cost of a master policy) must exceed the amounts paid out to settle claims. It follows that the way to reduce premiums is to reduce claims. We believe that the way to do that and still maintain full protection for our clients isn’t to cut down on cover but to encourage risk management and good working practices.
Not that this hasn’t been at the top of the agenda in the 16 years since the start of the open market. Improvements have been brought about by law firms’ own efforts, adherence to codes of conduct, Lexcel and other quality accreditations, implementing increasingly sophisticated case management software and the efforts of insurers and brokers to highlight how claims can be avoided or contained.
The impending consultation is expected to cover old ground, suggesting lower limits of indemnity, shorter run-off periods, and cover being compulsory only in respect of individuals, charities and smaller enterprises – as seen in the abortive review in 2014, Proportionate Regulation: Changes to Minimum Compulsory Professional Indemnity Levels. Even if the claims statistics published in October 2016 could be relied upon, one of the headlines was that 98 per cent of claims were settled at less than £580,000. What are the real-life implications of this? It’s clear that attritional claims lead to pound-swapping at a poor rate of exchange for the buyer, so if the legal sector were one huge law firm, it probably wouldn’t insure below £500,000. It would bear its own predictable losses up to that level, with some kind of ‘stop loss’ aggregate arrangement to cater for particularly poor years. What it would insure against is the catastrophe risk – the small percentage of claims that could individually run into the millions of pounds. These are less predictable, upon which underwriters can put a price in the hope that losses will be less than the premiums collected.
Catastrophe risk
Of course, the legal sector isn’t one big firm and insurance has to be available for the regular and expected losses of the individual firms. Being able to predict that claims will happen doesn’t mean that it can be predicted to whom they’ll happen, so insurance cover must still be available for this predictable tranche of losses. The qualifying insurers must between them collect sufficient premiums for the sub-£580,000 claims to be dealt with, so why would insurers reduce the total pot of premium if the vast majority of claims would still fall within
a £500,000 limit? At best, it’d be a nominal reduction. That the minimum limit increased from £1m to £2m/£3m for any one claim in 2005 without any meaningful effect on the legal professions’ overall premium also implies that the reverse is unlikely to have a much different result.
Given that the vast majority of predictable losses are below £500,000, the catastrophe risk will lie with the small number of losses above that level. A law firm that considers a revised standard lower limit to be inadequate will still have the option (and currently the duty, under Outcome 7.13) to buy top up cover. However, this probably won’t be as wide as the minimum terms, so it wouldn’t respond to all the claims currently covered. And since the premium reduction for the lower limit will probably be nominal, as seen above, the cost of buying the top up cover will, in fact, add to the typical law firm’s insurance costs. And if a less prudent law firm doesn’t buy the top up cover, a catastrophe level claim could well result in out-of-pocket claimants and closure of the business.
When the consultation is issued – whether you agree with the above or not – we encourage all law firms to make their thoughts known.
Footnote: 1 – Source: SRA news release 20 October 2016
Footnote: 2 – Source: Clause 55, SRA discussion paper Protecting Clients’ Financial Interests, 8 July 2015
Chris Robinson
Associate Director at Howden Professional Indemnity
019 2424 1916
chris.robinson@howdengroup.com
This article originally appeared in Pi, the magazine for professional services firms operating in a high risk world. To read the latest edition or to subscribe, please click here.
