SRA PII consultation: flawed, rushed and dangerous

In a harsh economic environment, the cost of professional indemnity insurance (PII) has become particularly burdensome on the legal profession. Solicitors Journal, in partnership with Miller Insurance Services LLP (Miller), invited key stakeholders to discuss what the SRA's latest consultation on PII means for all law firms

Since the financial crisis began in 2008, obtaining professional indemnity insurance at an affordable rate has become an important issue for most small and medium-size firms. Despite the assigned risk pool (ARP) closure and difficult market conditions, most solicitors in England
and Wales were able to renew their PII last October. That said, some small firms found the process problematic.

Some commentators may attribute some responsibility to insurers after a few top providers withdrew from the market, including XL Group, which was the largest PII insurer. In previous years, more insurers entered administration or liquidation: Quinn in 2010, Lemma in September 2012 and then in 2013, the beleaguered unrated Latvian insurer, Balva.

In a consultation that coincides with its decision to drop plans prohibiting solicitors from using unrated insurers, the SRA is considering reducing the minimum PII cover required for small firms to £500,000, from £2m for traditional partnerships and £3m for incorporated practices. It plans to halve the run-off cover - when an insurance company pays for claims made against a firm after it closes - from six years to three.

Along with a reduction in the minimum cover per claim, the SRA has also proposed a cap on insurers' ultimate exposure through a new aggregation limit, with suggestions of £1.5m or £5m. The consultation ends on 18 June with the regulator hoping to have reforms in place by 1 October. However, the pace and content raises significant issues that require consideration from all stakeholders.

Flawed approach

Many commentators have argued that the unduly high bar that the SRA's minimum terms and conditions of insurance impose on the profession is the real issue worth considering.

"The insurance market is not working for law firms," says Legal Risk partner Frank Maher. "When you have so many firms covered by insurers who have become insolvent, then the system can't be working, and the reason underlying that is that the minimum terms are too wide.

"I've been pressing for a long time for a root and branch review, starting from the ground up, rather than asking which bits can we chisel away."

Maher explains, however, that the consultation does not address unpaid premiums, which he believes is a big problem. "Too often, firms have gone bust, insurers have to cover them for six years, and the premium doesn't get paid. That's a huge exposure and a key area I would like to add to the SRA's shopping list," he says.

"The big question is the aggregation issue and in reducing the cover from £2m-£3m to £500,000. Are you covered for multiple claims or just a single amount? In itself, it wouldn't actually make a lot of difference because most of the claims are probably less than £100,000, so it's the aggregate cap which has potential."

Mark Carver, head of UK PI at Miller Insurance Services, finds the consultation on aggregation problematic and dangerous as it is difficult to give an informed view. "We're being asked to comment on aggregation, without looking at what the aggregation clause actually is," he says.

"From an insurance market perspective, I don't think we'll have objections to any form of consultation. The minimum terms and conditions do need reviewing, and probably from the bottom up. Where the frustration comes from in the market is not the fact the consultation is happening, it's the timing of it.

"To expect a full consultation and implementing it in less than six months seems unrealistic."

The consultation fails to take into account that insurers will have to change their proposal form, the policy wording, rating and resources in a narrow space of time, adds Tim Norman, director at Chancery Pii. "If changes are brought in too quickly, without enough consultation, it could actually be detrimental to the sector," he says.

Browne Jacobson partner Michael Howard notes that the consultation is based on a report commissioned by the SRA from 2010. "Now is probably a good time to have a consultation, but let's not rush it. The timing is poor in that the significant changes that are being proposed just aren't being given adequate consultation time to reflect upon it."

Angus Turner, partner at Mills & Reeve, believes it creates all sorts of problems. "From a broker's perspective, it is a nightmare. You've got to advise law firms what this all means in
a short space of time.

"Look at the market last year, it was incredibly difficult to get insurance in place in time, and that was when it was relatively stable. I'm not sure what the SRA is aiming to do here. It seems like a sticking plaster. This could be a two-year job."

David Cable, head of UK professional indemnity at Allianz Global Corporate & Specialty, remains unconvinced that the process will even achieve its aims. "There's not enough time," he says. "We're still unclear in the document what we're being asked, what's expected and what the intent is. If the intent is to get more competition and reduce prices, I don't think that's what
it is going to do."

Norman believes any changes will be far from straightforward. "As a result of the consultation, we have had to plan for a number of potential outcomes to the mechanics of our approach that may need to be implemented at short notice, which the SRA appears to have given little thought to."

The number of firms that risked closure after failing to secure PII cover reached 153 in 2013. Of those, 136 ceased to practise after entering the extended policy period last October. A further 80 firms are being investigated by the SRA for issues of non-compliance or non-disclosure to insurers. But with 10,726 practising firms in England and Wales, is the above figure really that worrying?

Maher says: "Yes, because it is all those firms out there who are looking to find cover and give them peace of mind for the next six years. That's particularly the case for firms which closed because they couldn't get alternative cover and had to pay a run-off premium to an insolvent insurer. That stuck in the throats of quite a few. It's broken."

So, a cynical observer may wonder why the SRA is pushing ahead. Carver says: "The SRA received a huge backlash from the press and the profession in relation to unrated insurers. Those plans were abandoned but then, less than 48 hours later, we have a new populist consultation. It's like the SRA has gone from one extreme to the other."

He continues: "The reaction from the legal profession has been positive but that doesn't necessarily make it right. Is the SRA's most recent consultation a panic response to its decision on unrated insurers? It may be too simplistic, but it seems like a rushed consultation."

SIF return

Prior to 2000, the solicitors' PII market operated via the Solicitors Indemnity Fund (SIF). This mutual fund, established by the Law Society, effectively meant the profession became its own insurer. SIF provided PII to all firms in private practice regardless of their practice area, size or claims history.

However, as the Law Society discovered, the difficulty with any mutual is that the entire risk of PII claims is borne by its members.

 

'Without a policy, we can't practise' Kevin Poulter is editor at large of Solicitors Journal and an employment solicitor at Bircham Dyson Bell Before I was asked to chair this roundtable, I didn't know very much about PII insurance. Now I do, I wish I had realised the significance of it sooner. If you're lucky, you will never have dealt with an insurance claim, either personally or professionally. Inevitably though, at one time or another, you or someone else in your firm, will have to face an insurer head on. Regardless of the type, size or structure of your firm, you are required to have professional indemnity insurance in place - and a lot of it. At the moment, a minimum of£2m. As for everything else - the excess, the gold-plating, the premium - it's all up for negotiation. Or so I thought. Changes in the way legal services are delivered, the squeeze on fees, a rise in claims and the relentless economic depression has left some firms struggling to find one provider, let alone select the best deal. As for a free stuffed meerkat? Well, think again. For all solicitors, PII is a given. It's an assumption that we make as trainees and fee earners. As an employment lawyer, every time I sign off a settlement agreement I am required to confirm I am insured. I am. Without a policy, we can't practise. We can't sell our services. But it doesn't come cheap, especially if claims have previously been made. Reducing exposure to claims by limiting risk and implementing good practice management procedures is an obvious step, but not always easy to achieve in the fast-paced work environment in which we work. Without checks in place, for example, it's all too easy to tick the wrong box on a form or miss a deadline. But the consequences in the current climate can be, well, terminal for some firms. Change is afoot, but what won't change is the approach that insurers take to risk. At all costs, keep it to a minimum. It might sound obvious, but the best way to a premium deal is to stay claims free. That's everyone's responsibility.

 

With doubts raised over the consultation, is a return to SIF a viable alternative to consider? Howard believes that the City of London Law Society would not countenance a return to SIF. "It just will not happen because of the perceived excess premium that was charged that was not commensurate with the risk to larger firms," he says.

"That was why it went to the open market. Is there potential space for something more convoluted where there might be a mutual for the lower end? I don't know whether that will be possible."

Carver, however, suggests that it may be "a master policy, not affecting the whole profession, but an opt-in and opt-out at the smaller end".

"Whether it would satisfy the demands of the smaller end, I don't know," he says. "I would wait until all the pricing is there because the downside of that is you're then looking at portfolio basis pricing, and I'm not sure that would be at the levels they are currently enjoying in certain segments of the market."

Maher thinks lack of flexibility precludes bringing back SIF.

"The difficulty is that it wasn't a mutual, it was a statutory fund. That meant that, for technical reasons, you couldn't underwrite risks. The premium had to be charged on a mathematical formula and it doesn't matter what you do with the formula, it'll always be wrong and unfair on someone."

False comfort

In May, the SRA announced that it was dropping plans to introduce a minimum rating requirement on participating insurers but resolved to keep the decision 'under review' as the root issues underlying the initial proposals, namely the risk posed by the failure of unrated insurers, remains unresolved.

Solvency II, the EU directive that codifies and harmonises EU insurance regulation, is primarily concerned with the amount of capital European insurance companies must hold to reduce their risk of insolvency. The SRA claims that this directive negates the need for insurers to maintain a minimum rating.

"It's almost letting someone else decide the problem," says Carver. "Let's let Solvency II and the banks solve this issue, rather than the regulator. One of the SRA's responsibilities is to
protect the public. Either it wants them or it doesn't. It's a side step."

The levels of cover suggested in Solvency II are highly contentious, according to Howard."There's international concern about where the line is going to be drawn. People need to have choice to determine whether their insurer has adequate solvency requirements.

"What the Latvian regulator considers appropriate may not be what we would consider appropriate in the UK. It is going to be difficult to adopt a one size fits all approach."

Maher says he was opposed to a rating requirement because he felt it was giving "false comfort", and would only restrict the market and put firms out of business. "There is also a competition law question of whether they could even impose a rating requirement."

Yet, the issue may be nothing more than a red herring according to Turner. "There are bigger issues. I think firms are quite capable of deciding which insurer to go with, on advice from their broker," he says.

The PII market for solicitors is different from others. Insurers would like to see change in the cover provided to enable them to know with certainty what their maximum exposure is likely to be.

"Insurers should have the ability to aggregate cover, irrespective of whether it's a small firm or a big firm," argues Cable. "The onus should be on the firm to make a call. Insurers aren't asking too much."

The scope and breadth of cover has been seen as problematic for insurers in the past. "There's been an expectation from the profession that insurers will cover all of these risks, where in a normal PII policy they wouldn't necessarily be obliged to," adds Carver.

"To my mind, it needs to be rebased as a straightforward PII policy you would expect for an architect or an engineer. Lawyers aren't necessarily a special case."

Panic mergers

The economic downturn, coupled with increased globalisation and expansion into new markets, has undoubtedly led to an increase in mergers and acquisitions.

At Legal Risk, Maher has seen many panic mergers in recent years. "During the last renewal, a lot of firms came to us for advice on how to take over either a team, or a whole firm, without becoming a successor practice to them.

"We have record levels of that on this renewal. People are anticipating the next renewal problem and firms are already talking to each other. They are looking to isolate the risk of problem practices in the process."

Howard advises firms to be fully aware of what they are taking on. "From an underwriting perspective, you've got to be careful of where files have gone. Zombie files are still out there. Some firms that haven't sought advice may have inadvertently become successor practices without necessarily realising it."

Supervision of both staff and partners is clearly a key component to show potential insurers that a firm is not a risky bet. Turner recommends having a clear risk management strategy ready to present to insurers.

"However big or small you are, you've got to proportionally have a level of risk management within the firm. Take it seriously and show that," he says.

 

'Balance and insight' Mark Carver is head of UK PI at Miller Insurance Services LLP It's no secret that the solicitors' professional indemnity insurance (PII) market is in a state of turmoil. Rated insurers have withdrawn from the class, leaving legal firms with limited options for renewals. It's no wonder unrated cover may look attractive under these circumstances but use of these entities could pose a significant risk to legal organisations. Coupled with the recently announced results of the consultation by the Solicitors Regulation Authority on minimum requirements and unrated cover, it paints an uncertain future for the sector in the coming years. At Miller, we decided that it was time to get leading specialists in this field together to gauge what the implications of the SRA consultation might have and what the future might hold for the PII market. The conversation that took place was both balanced and insightful. I would like to thank the entire panel for giving their time and insight to this topic, Solicitors Journal for providing the framework for the discussion and you, for reading it. If you have your own thoughts on this matter, we would be delighted to hear from you. Please don't hesitate to contact me if this is the case.

 

Be realistic

Carver says: "The key in this market environment is being realistic. Keep on top of everything that's in the press, because it's a fair idea of what the market is likely to be. Look at what your professional indemnity spend is and start budgeting for 'what if' scenarios."

Results of the consultation are expected in August and there is limited time to implement proposed changes, leaving both the profession and the insurance industry with little guidance and a significant degree of uncertainty.

While, in general terms, many stakeholders welcome the consultation, they would like more time to consider it, so that the professional can move forward in a more measured way without cherry-picked issues or broad brush proposals. SJ

• Kevin Poulter, editor at large, employment solicitor at Bircham Dyson Bell, roundtable chair
• John van der Luit-Drummond, legal reporter

• Angus Turner, partner, Mills & Reeve, 114 partners and 400-lawyer firm
• Michael Howard, partner, Browne Jacobson, 98 partners and 366-lawyer firm
• Frank Maher, partner, Legal Risk; solicitor advising a cross-section of law firms on professional indemnity

• David Cable, head of UK professional indemnity, Allianz Global Corporate & Specialty
• Tim Norman, director, Chancery Pii, created to address concerns over the risks of unrated insurers, market stability and broker commission and to specifically meet the needs of solicitors in one–four partner firms

• Mark Carver, head of UK PI, Miller Insurance Services, a chartered insurance brokerage focusing on specialist areas including professional indemnity

---