Insurers reel from double-whammy of solicitors’ PI setbacks

Insurers suffered a double blow this week when long-awaited solicitors’ professional indemnity reforms fell short of expectations and they were hit with a £38.6m charge to cover long-tail claims.

When the Solicitors Regulation Authority (SRA) reforms were released last week, insurers immediately homed in on the controversial assigned risks pool (ARP) – a back-stop for solicitors who cannot buy cover on the open market.

Insurers wanted the ARP scrapped, but instead the SRA says it will not be replaced until 2013. Biba, the ABI, Chartis and Zurich have been vocal about the need for reform to the ARP.

Chartis says insurers have forked out £100m between 2005 and 2009 on the risk pool and the costs are escalating. It called the reforms “disappointing”.

A Chartis spokesman said: “Insurers cannot continue to bear unquantifiable levels of risk from legal practices that they elected not to trade with, particularly with the stricter capital requirements that Solvency II is likely to bring.

SRA director of standards Richard Collins said: “It was clear from these that the biggest challenge the SRA had to address was the ARP. This is a complex issue and it is impossible to satisfy all parties. However, we believe that the arrangements now approved offer the best way of ensuring client protection through a competitive insurance market.”

At the moment, funding for unpaid premiums and claims in the ARP is shared between insurers according to market share.

The SRA offered a crumb of comfort to insurers by revealing that ARP costs should be shared between solicitors and insurers in October 2012. It also reduced the amount of time a firm can spend in the ARP to six months, starting from October.

But Zurich legal professions manager Jenny Screech said: “We’re extremely disappointed the issue has not been addressed. The ARP needs to change if we are to have a sustainable model for the future.”

The second blow was the £38.6m cash call by Capita, which administrates the ARP, to cover outstanding claims from prior years. A breakdown of the bill reveals that the sum amounts to £3m in 2010/11, £15m in 2009/10, £17.5m in 2008/09, £3m in 2007/08 and £125,000 in 2005/06.

Zurich, Travelers and Chartis are three of the largest insurers in solicitors’ PI with the greatest exposures. Overall, Chartis is likely to take the biggest hit, as it had a 15% market share in both 2008/09 and 2009/10. Zurich will also feel the pain as it had a 17% share in 2008/09 and 12% in 2009/10.

Last year, several insurers, including Catlin and Hiscox, dropped out of the solicitors’ PI market after mounting concerns about the ARP and rising claims costs.

Despite the ARP setbacks, there is doubt that capacity will shrink because historically new insurers have always filled the gaps. Manchester Underwriting chief executive Charles Manchester said: “There is no logic in the solicitors’ market. There ought not to be a competitive market this year, but based on past years I bet there will be.”

Clear Insurance Management professional risks director Daniel Innes said: “The market needs more financially stable, well-regulated insurers backing it. Any changes that encourage them back can only be a good thing.”

Last year, new capacity was picked up by firms such as Danish insurer Alpha and Ukrania-based Lemma, along with Inter Hanover.

UIB divisional director Simon Lovat said: “I don’t think anybody in the insurance industry would see this as a reform. While this is a news event, the news event is that there is no news. There is no change.”