Has the profession really paid less for its indemnity insurance?

By Kevin McParland
The Old Bailey reflected on a window

In light of the Review of the SRA Client Financial Protection Arrangements report, Kevin J McParland, Managing Director of McParland Finn Ltd asks: ‘Has the profession really paid less for its indemnity insurance?’, and ‘what is around the corner?’

In this article we have the opportunity to analyse the initial figures provided to the Assigned Risk Pool (ARP) managers, by the Approved Insurers.

Additionally, the presentation by Charles River Associates of the SRA-commissioned report “Review of the SRA Client Financial Protection Arrangements” may provide an insight into the mindset of the SRA as the consultation process on this issue is about to commence.

The table below contains information provided by the insurance market to the ARP: 

Insurer 2010 Position 2010 Premium Market Share 2009 Position 2009 Premium Market Share
Chartis 1 £38,560,000 18.057% 1 £36,015,531 14.92%
Hanover 2 £30,780,000 14.412% 9 £10,817,215 4.48%
XL Insurance 3 £28,470,000 13.332% 6 £17,189,230 7.12%
Zurich 4 £27,500,000 12.900% 3 £30,833,892 12.77%
Travelers 5 £23,500,000 11.037% 2 £32,270,553 13.37%
QBE 6 £17,550,000 8.218% 4 £24,080,376 9.97%
Allianz Global 7 £13,200,000 6.409% 8 £10,962,088 4.54%
Aviva 8 £9,056,000 4.244% 10 £9,523,012 3.94%
Lemma Europe 9 £6,140,000 2.926% 15 £2,499,066 1.04%
RSA 10 £4,780,000 2.243% 7 £14,168,620 5.87%
W R Berkley 11 £3,880,000 1.826% 12 £4,932,939 2.04%
Alpha Insurance 12 £1,820,000 0.856%
Liberty Mutual 13 £1,350,000 0.635% 17 £1,429,417 0.59%
Solicitors Ind Mutual 14 £1,170,000 0.552% 19 £1,214,522 0.50%
Aspen 15 £1,150,000 0.539% 16 £2,412,142 1.00%
QBE 16 £1,100,000 0.518% 18 £1,315,933 0.55%
Chubb 17 £990,000 0.468% 20 £1,050,332 0.44%
Pembroke Syndicate 18 £930,000 0.435% 22 £707,465 0.29%
Barbican Syndicate 19 £500,000 0.235% 11 £8,463,022 3.51%
AG Doré 20 £330,000 0157% 21 £806,462 0.33%
Total Minimum Terms Premium – 2010:  £212,756,000
Total Minimum Terms Premium – 2009:  £241,455,693

The following insurers wrote business in 2009 but withdrew from the market in 2010:

Insurer 2009 Position Premium Market Share  
Quinn 5 £23,783,385 9.85%
Hiscox 13 £4,029,895 1.67%
Ace 14 £2,825,031 1.17%
Catlin 23 £125,556 0.05%

Before we begin to analyse this information, it is essential to understand why these figures are important to both the profession and the insurers alike:

  • the figures are important to the profession because they will be interpreted by the SRA and may influence their future decisions on the model for providing protection to the consumer.
  • from the insurers’ perspective, the figures are used to determine the amount of each insurer’s contribution to the ARP, to pay for claims emanating from practices who now find themselves having to obtain cover from this market of last resort.

I must make it clear that the figures provided are essentially the “first cut”.  The insurers will be invited to re-submit their figures in February 2011.

For reasons I will explain, I believe the above figures are probably incorrect to a significant degree, and the SRA needs to understand that this is so. For example:

  • the figures indicate that there has been an 11.9% reduction in the purchase cost of Minimum Terms coverage, from £241,455,693 in 2009 to £212,756,000 in 2010.  For many of the practices that experienced the pain and suffering of the 2010 renewal season, that will come as something of a shock. I am certainly shocked, as the figures simply do not appear to reflect the reality of the situation.
  • there are a number of reasons why the figures may be genuinely distorted but it’s difficult to see how these account for the apparent extent of the distortion. The main factors are:

–      there are approximately 150 additional practices currently in the ARP;

–      a number of practices have now ceased to trade.

To get to the truth, one has to drill down into how the insurers operate and how they evaluate the information they provide.  There does appear to be growing concern about the validity of the figures provided, even to the extent of a call for an independent audit of the figures produced by insurers.

It is relevant to consider why insurers would even consider manipulating the figures. I hasten to add that there is no specific evidence of any wrongdoing but when 1+1 does not equal 2 then at least questions should be asked.

All insurers have to contribute to the ARP in the same proportion as their market share of solicitors’ Minimum Terms business. Whilst the ARP was fairly benign until 2008, it is now a substantial drain on resources for insurers, with ARP claims expected to exceed £50m each year in 2008, 2009 and 2010.

Therefore Chartis’s contribution in 2009 would be 14.9% of the ARP losses of £50m, which is £7.45m. That means Chartis has to cough up £7.45m to pay for claims incurred by poor quality practices in the ARP, over which Chartis had absolutely no underwriting control.

Simply put, it is not in the interests of insurers to overstate their premium income, as that will inevitably lead to a bigger contribution to the ARP.

Some of the measures adopted by insurers to dilute their exposures to the ARP are as follows:-

  • substantially increasing deductible levels (self-insured retentions) against a reduction in premium.  This is can be risky for insurers if they do not ensure that insured practices have sufficient capital adequacy to fund these increased deductibles, as the insurer is obliged to pay the whole amount of any claim if it cannot recover the policy excess from the insured practice;
  • deductible infill covers: these are theoretically outside the scope of the Minimum Terms.  This is the practice of providing Minimum Terms cover over a large insured deductible, say £250,000 per claim.  An expensive premium is then charged for the infill cover and a much cheaper premium is charged for the Minimum Terms cover than would otherwise be the case.
  • larger practices are choosing to have their Minimum Terms cover higher up their excess layer programme, thus reducing the cost of the compulsory cover.

The above are all legitimate methods of reducing the cost of Minimum Terms cover but they can of course distort the figures when compared year on year, leading to the erroneous belief that premium levels have reduced rather than increased.

I must also add that there is a rumour doing the rounds of the market that insurers who are prepared to offer higher limits of indemnity, e.g. £5m or £10m (against Minimum Terms requirements of £2m or £3m) may not be declaring the true cost of the Minimum Terms element to the ARP, again distorting the data.

Looking a little closer at the figures provided:-

  • on the face of it, there was an 11.9% reduction in premium;
  • those insurers who dropped out this year, i.e. Quinn, Hiscox, Ace and Catlin, wrote premium of £30.7m between them last year;
  • insurers who increased their income (and new entrants to the market) wrote an additional £37.8m compared to 2009;
  • insurers who reduced their exposure this year reduced income by £58.7m;
  • the main change in the market is the extraordinary growth of XL Insurance and Hanover, writing an income of £59.2m between them, representing 27.8% of the market, an increase of more than £31m over last year.

If you consider the volume of capacity going out of the market and the additional premium written, against a background of most practices paying an increased premium this year, some paying substantial increases, you will draw your own conclusion.

There is one very fundamental consideration: could we in reality have a repeat of the Quinn situation, where a number of insurers are buying in business at uneconomic premium levels?

Whatever the validity or otherwise of the “first cut” figures, it is vital that both the profession and the SRA do not accept them at face value and draw erroneous conclusions.

The SRA, having commissioned the “Review of the SRA Client Protection Arrangements”, of which professional indemnity insurance plays a prominent part, will now be analysing its contents and perhaps adopting its conclusions as the basis of a consultation process.

I suggest most solicitors accept that, although the position has been exaggerated by the economic difficulties over the past couple of years, there are simply too many poor practices which are letting the profession down, incurring extreme negligence and fraud claims against themselves. While the Charles River Associates’ report examines many issues, this fundamental problem has not been addressed.

The report itself, while lacking a little in innovation, does raise some interesting points:-

  • the common renewal date does not benefit the profession and could be the reason why some firms are in the ARP;
  • a more sophisticated underwriting approach should be taken to firms in the ARP, rather than charging a flat premium of 27.5% (reduced for larger firms);
  • the suggestion of a compensation levy-type funding for the ARP;
  • the current Minimum Terms model is acceptable, with perhaps less protection being necessary for larger corporate clients;
  • there has been regulatory failing with regard to conveyancing work and changes are required.

The report is a substantial document and, as always, the devil is in the detail.

The Approved Insurers, who have been subsidising the current insurance model, are not impressed by the report.

Kate Carr, Assistant Director of Markets & Regulation at the Association of British Insurers, said “This report clearly highlights the value of a competitive insurance market for solicitors’ indemnity insurance. But it also highlights what we have long argued for, a fundamental change to how this market operates to ensure a sustainable future for solicitors’ indemnity insurance. This market cannot tolerate periodic crisis, caused by a combination of poorly enforced regulation and restrictive policy requirements, such as insurers’ requirement to stay on cover when premiums are not maintained”.

There is obviously a big gulf between the SRA and the insurers, i.e. the body on the one hand that creates the rules and the body on the other hand that picks up most of the tab.

Progress will be reported in future articles.

Kevin J McParland

Managing Director

MFL Professional

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