Is Customer Protection the Holy Grail? Is the SRA Playing Russian Roulette?

By Kevin McParland
The Old Bailey reflected on a window

I was fortunate to be asked to attend the Law Society Question Time on the 12th May at the Renaissance Hotel here in Manchester.  Presentations on the range of issues concerning the Legal Profession were made by Des Hudson and Linda Lee, the national president.

Within the range of topics discussed was of course Professional Indemnity Insurance.  It was extremely interesting to listen to the views expressed by Des Hudson on the stance of the Law Society and the impression that was being given.

Having promised Fran Eccles-Bech to be on my best behaviour, I did not take up any issues with either Des or Linda in the formal part of the evening but I must say I was most concerned with what I would call the selective issues and views expressed.  Unfortunately, my good behaviour did not extend to me remembering to turn off my mobile which was in my brief case and as I was sitting in the front row, my fumbling around to find the off switch led to Des Hudson commenting, “Another person who does not know how to operate a mobile”.  I stand guilty as charged and offer my profound apologies!

After the meeting, over a glass of wine, once the conversation had run out of steam on the weekend’s key football matches, (I was surprised the first leg play-off between HUDDERSFIELD and Bournemouth did not figure a little higher on the agenda… however), discussion began to address Professional Indemnity Insurance.

It became very clear to me there were very firm views held on the issue of Customer Protection, any dilution of which was the equivalent of the first step on the path to Ruin and Damnation.  In effect, Customer Protection is the Holy Grail, these views being strongly held by the Law Society both locally and nationally.

It was at this point I had to admit I was not from the profession and further, that my view of the Holy Grail was that it was OK but who should pay for it!  It was at this point that your President, Linda Lee accused me of being from the dark side.  I know Huddersfield is on the other side of the Pennines, but…

Here lies the problem, and it is a difficult one: how to reconcile the extent of Customer Protection, ie the Minimum Terms and Conditions, with the outrageous cost to fund.

Not once did the earlier presentation make mention that the cause of the problem was due to some Law Society members being negligent, being fraudsters or being thieves of client monies.  It is amazing how it was seen as an insurer problem and the way to tackle it being the introduction of new entrants to the market.

Whilst I believe the Minimum Terms and Conditions go too far to protect the customer much further than any other profession, I do not argue that the profession is within its rights to raise this bar to whatever level is felt appropriate.

It’s the who is expected to pay for this and how, that causes me and the insurance market a problem.  It is the desire of any insurance buyer or risk manager to have an insurance market of continuity and stability in both terms of availability of cover and pricing levels.  The current market is not providing those key essentials.

The legal profession will have to accept that it will have to bear more of the cost to maintain this Holy Grail of Customer Protection in the future.  Extensive pressure needs to be exerted on to the SRA for them to bring what is a relatively small number of “Rotten Apples” to book!

The SRA published the results of the consultation process and pronounced on their intended course of action.

In the insurance year 2011-2012, the maximum length of time firms can reside in the Assigned Risk Pool (ARP) has been reduced to 6 months.

In the year 2012-2013, the (ARP) will be partly funded by the Legal Profession via the Compensation Fund.  I seem to recall Des Hudson mentioning a maximum figure of £30m pa.  Unfortunately, I was wrestling with my mobile at that precise moment!  Further changes to be made in 2013-2014.

The SRA has missed an opportunity to reduce the fears of the insurance market and thus encourage new entrants and for those insurers currently approved, to increase rather than continue to reduce their capacity.

As a consequence and in my opinion, any new insurer contemplating providing capacity to the solicitors’ market must have money to burn or be extremely foolish. 

‘Why?’, you may ask:

  • The Minimum Terms and Conditions are too wide and provide no incentive to firms to practice good compliance and risk management;  In fact, firms consider that the purchase of PII cover is their risk management.
  • The SRA has in general not got to grips with the problems and do not give the insurance market the confidence, at least in the short term, that they will.
  • The change to the ARP rules made to become effective in 2011 will, in the short term make the problem worse for insurers.  It is not too much of a stretch to conclude that after 6 months in the ARP, most firms will have to close their doors and go into “run off” with the insurers picking up the risk for 6 years, probably without receiving payment of the premiums to which they are entitled.

The table below shows the top 10 insurers (as at March 2011) providing Minimum Terms cover to the legal profession.  Of the 6 mainstream markets in that top 10, it is doubtful that any will increase their capacity (ie Chartis, Zurich, Travelers, QBE, Aviva, RSA).  They will continue to cleanse their books and may possibly reduce capacity.

Of the remaining 4 markets, Allianz are being very specific and will remain pretty much the same.

Hanover Re and XL are new entrants, 2011 will be their second renewal.  They will of course have to defend larger books of business and may not therefore be as aggressive in 2011.  Also, and more importantly, the combination of no real change in the ARP and the fact that their losses will now be beginning to crystallise, may even result in them offering reduced capacity.  At the same point in time Quinn Insurance began to feel the strain and their loss in the UK is thought to be in the region of £497m.

Top 10 insurers (as of March 2011) providing Minimum Terms cover to the legal profession

By delaying any meaningful changes, the SRA are playing roulette with the profession’s reputation and finances.  They are gambling that by whatever means the insurers will continue to bail out the legal profession.  The big question is whether or not the market will continue, or pulls in its horns until its exposure to the ARP (ie the risks it has chosen not to underwrite) has been reduced.

Kevin J McParland

Managing Director

McParland Finn Ltd

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