An article in the Law Society Gazette on 24th March presents the Law Society view that imposing a minimum financial strength rating on insurers in the solicitors PII market will restrict competition, and remove a lifeline for smaller practices, already hit by increasing premiums and a difficult trading environment.

There is no doubt that many law firms are facing a perfect storm.  The question is whether the Law Society have targeted the right enemy?  I would suggest not.

Unrated Insurers - the answer to effective competition?

Effective competition is vital - but looking to unrated insurers as a way of providing what has often proven to be unsustainable competition cannot be the answer.  Steve Holland's (Solicitors Practice Group Team Leader at Lockton) recent series of articles published on this site, sets out the reasons well - and those who opine that a return to SIF is the answer, have a difficult case to answer, given the sustained fall in premiums since the Open Market regime was introduced in 2000.

The real problem is that many of the reputable rated insurers that previously were in the solicitors PII market have exited because it was rapidly becoming an unsustainable market for them as claims flooded in at the same time that investment income plummeted (a traditional source of profit for insurers).  New unrated insurers such as Quinn, Balva and Lemma have filled the gap - and superficially seemed to provide a welcome safe-house' for many firms - offering lower premiums, particularly to smaller firms and those with significant amounts of 'high risk' work on their books.

It is easy to understand why the Law Society sees a challenge to these unrated insurers as being detrimental to many of its more vulnerable members.  Except that these unrated carriers tried to pile it high and sell it cheap, and in the process took on many of the most toxic risks at unrealistic premiums, without the financial stability to cope with any significant claims influx, let alone the deluge that characterised the last 5 years of the residential conveyancing market. By way of example, as reported in the Insurance Times (25th March), the estimated loss ratio of Lemma Europe's solicitor PII book was as high as 300%.

The result - far from providing vulnerable firms with a good long term solution - has been to put their very existence at risk, not to mention the risk to employees and clients of such firms. This is not a responsible answer, nor does the profession any services in the long term. Which of us would put our or our clients' money in banks that didn't meet a certain security standard? Why should insurance be any different?

Changes to MTC Wording - a better solution?

A quick glance at the online forum following on from the Gazette article indicates a prevailing view that the current insurance terms that solicitors require to sign up to (the Minimum Terms & Conditions, which Participating Insurers are obliged to offer) are out of kilter with those required of other professions with whom solicitors are increasingly in competition.  It's not simply the breadth of cover required, but, for smaller firms, the amount of cover that is required, that many would take issue with.

I have an increasing sympathy with this body of opinion - although my impression is that reducing the minimum level of compulsory cover from £2m (traditional partnerships)/ £3m (LLPs Ltd Co.s) is in itself unlikely to have a significant impact on premiums - given that it is the volume of attritional claims rather than the number of claims above, say, the £1m threshold, that are responsible for the vast bulk of the claims experience.

Addressing claims risk issues

The reality is that solicitors cost insurers far more in claims than other professions. This may be in part due to the MTC wording. In an ABS world, the profession and its regulator do need to be reviewing whether more onerous insurance requirements place solicitors at an unfair disadvantage.  But that can only be part of the answer.  It's essential that we also address the root issue behind the volumes of claims emanating from property work - in particular residential property work (in very crude terms, according to Lockton's statistics, over the past 5 years around 25% of firms' PII premium could be attributed to the cost to insurers of CML Handbook claims against conveyancers).

Is the CQS scheme working? Is the CML Handbook really working for solicitors, lenders and clients? How can smaller conveyancing firms become sufficiently 'de-risked' to avoid continuing to be hit by prohibitive premiums?

How Lockton can help

At Lockton we try to play our part, by providing risk management training and guidance to our clients, not least through our current Conveyancing Conferences, being run in conjunction with TM Group.  There is no one simple answer however - and it will take a co-ordinated response from the profession to create an environment where the PII market can truly work for the whole profession.

Calum MacLean is Risk Manager in the Professions Team at Lockton.

This article reflects the personal views of Calum MacLean and does not necessarily reflect the views of Lockton Companies LLP.