Ethnic discrimination: do we have a problem?

Laitan Eyiowuawi says he’s proud of his legal practice. Since qualifying from law school in 1993 in Nigeria, he’s set up his own practice, London-based Crowthers Solicitors, specialising in commercial litigation, private client work and landlord/tenant disputes. He’s also never had a claim against his professional indemnity insurance (PII).

But last year, no insurer offered cover for his two-man practice by the October deadline and he ended up in the dreaded assigned risk pool (ARP). His firm eventually was eventually offered a £22,000 premium.

The ordeal has left Eyiowuawi wondering what he’s done wrong. He hints at ethnicity being an issue. He says: “All I can say is that one company would not quote because of ‘bad history’. In absence of a bad history, I don’t know what’s going on. Is it my height? Is it my size?”

Racial discrimination is a serious political hot potato, so few people are willing to speak directly about the subject. The theory goes like this though: ethnic solicitors are more likely to do work with their compatriots. Some will be taking advantage of Britain’s perceived ‘lax’ laws to be involved in mortgage fraud, immigrant smuggling and money laundering. Aggrieved parties take legal action against the solicitors, triggering PII claims.

An aggravating factor is that, allegedly, some insurers don’t believe the qualification process in foreign countries is as rigorous as the UK. That means solicitors who qualified abroad are more likely to be sued because they lack the qualifications to spot danger.

The fight begins

Eyiowuawi’s case, along with others, has been taken up by the Law Society and its sister body the Solicitors’ Regulation Authority (SRA), which have accused insurers of ethnic discrimination. Insurers are aghast, and backed by the ABI, rebut the accusations strongly. But the discrimination row is a distraction from a much bigger problem: what to do about the problematic ARP, a last-ditch place where solicitors who missed the October deadline can get PII insurance at an inflated premium. Insurers are seriously concerned about the escalating cost of the pool, likely to be swelled this year by Quinn clients unable to get cover.

Their fears are exacerbated by the fact that default rates – the numbers of ARP firms who don’t pay the inflated premium – are running at around 50%. That tab is eventually picked up by insurers.

The SRA is conducting a review of the pool, with a view to making dramatic changes for 2011. The SRA aims to solve the alleged discrimination problems, ensure solicitors have cover at a reasonable price and insurers don’t overpay for firms in the pool.

Big issue

But the problems are many and the solutions are few. For a start, most insurers and brokers simply don’t believe there is a problem of ethnic discrimination in the industry.

Clear Insurance Management broker Daniel Innes has scrutinised the Law Society’s survey of its solicitors in April.

The survey was used as evidence of discrimination, as it found that black minority ethnic firms (BME) were more likely to end up in the ARP. The survey also concludes that insurers took 56 days from application to notification of renewal for ethnic minority solicitors, compared to 44 days for the wider profession.

But Innes says the survey results are inconclusive and contradictory. “While the Law Society’s statistics for numbers for BME firms ending up in the ARP do not make good reading, the report does clarify that a significant number of these have reported claims or been subject to disciplinary action,” he says.

“As full details of these factors are not provided, I do not think it is correct to automatically assume that there is any form of discrimination by insurers of solicitors in the UK. This is highlighted by the report’s comment that BME firms were more likely to be paying a premium of less than £10,000 (56%), compared to 42% for the wider profession.

"Clear Insurance arranges cover for a significant number of BME firms and no underwriter has ever advised me that a declinature was due to the ethnicity of a particular firm or partner.”

Innes is backed by the ABI, and the entire industry, which says it has asked for stronger evidence of discrimination, though Innes says “none has been forthcoming”.

Push the button

The SRA remains tight-lipped in response. It has so far been in a series of meetings with the ABI and called for insurers to make sure they’re complying with equality legislation. It sets the minimum terms and conditions for insurers to take part in solicitors’ insurance. It could hit the nuclear button and adjust the terms and conditions in some way to help ethnic firms.

A spokesman said: “We understand there are concerns about potential difficulties experienced by BME firms and are looking at this as part of a root and branch review of financial protection that is under way and as part of our statutory duty to promote equality and diversity.

“The SRA has clarified the Qualifying Insurer's Agreement 2010, which comes into effect from 1 October this year, to make it a term of the agreement that qualified insurers must comply with equality legislation and we may in future request information on how they are complying.”

“It has also launched a root and branch review of the compensation arrangements, encompassing PII, the Compensation Fund, and the ARP, with a view to introducing further changes in 2011. In the meantime, we will be monitoring the situation closely."

The review, while also addressing the discrimination concerns, should also tackle the wider problem about what to do with the ARP pool.

Scrappage scheme

Earlier this year, the SRA had proposed scrapping the pool but instead modified it for the 2010 renewals. Newly formed legal firms won’t be able to enter the pool and firms can only sit in the pool for one year instead of two. Furthermore, firms that don't pay their ARP premiums will be banned from practising.

But that’s not enough. The ABI is lobbying hard for a levy on all solicitors to pay for the premiums of firms that drop into the pool. The problem with that is that solicitors’ firms across the board are very unlikely to accept such a hefty burden.

A compromise solution is proposed by Zurich UKGI broker division’s head of financial institutions, Stuart Quinlan. He says the model is “broken”, but one solution would be allowing insurers more scope to set policy terms. At present, insurers can’t cancel policies, even if, for example, a solicitor has been dishonest in proposal forms.

Another problem is that insurers have to offer six years’ run-off cover to solicitors’ firms.

Clawing back costs

Changing this set up is a possibility for 2011 but, in the meantime, the 2010 renewal season looks like one of a steep rise in rates. Solicitors, especially at two- and three-man firms, can expect big rises in their premiums as they are seen to be the most likely cases to make a claim because they don’t have the checks and balances of a larger outfit.

All this is against a fear that recession-related fraud is still on the up. PI managing director at Towergate, Alan Eyre, says insurers will want to claw back losses from previous years and to pay for the year ahead.

“Insurers will want to recover some of those losses in terms of the approach to the 2010 renewal,” he says. “I think insurers will be more selective in terms of what they will write. Also, some firms will see some very sharp increases in premium.”

Quinlan agrees: “It’s a guessing game as to what the cost of the ARP will be in the future. We have to price now for the ARP and we will only know after 1 October what the true cost is.”

The trouble is that sharp increases in premium could lead to more firms falling into the ARP in 2010, with the tab being picked up by the insurers. It will lead to further rate hikes in 2011 and the vicious circle will continue.

Unless, of course, the SRA makes some bold reforms. But don’t bet on it. IT