Will the SRA’s proposals be too weak, and implemented too late, to make a difference?
The unveiling of the Solicitors Regulation Authority’s proposed changes to the professional indemnity (PI) market left many insurers and brokers worried.
They are concerned that the reforms for 2011 are not bold enough and that the SRA won’t move fast enough to change the assigned risk pool (ARP) for 2012.
Zurich’s legal professions manager, Jenny Screech outlines the issues.
She says: “The ability to exclude claims by financial institutions from the minimum terms is a step in the right direction but the concern is that this will only apply to work undertaken post 1 October 2011 and it therefore provides no relief at all from claims arising as a result of the recent recession.
“These losses are significant and it is clear that recessionary related claims will continue to be made for some time yet. Accordingly, Zurich would expect this change to have little impact in the short term, which is disappointing and will impact on the next renewal.”
No talks til 2012?
The SRA plans to scale back the ARP and use it as a funding pot to pay for the run-off of solicitors that have closed down - the solicitors would have closed down because they couldn’t get PI on the open market.
However, these reforms are proposed for discussion in 2012, when they really need to be implemented for 2011.
The problem with the ARP is that it is such a huge drag on insurer’s resources. They have to price premiums higher, punishing the client.
Screech says insurers are having to pay out for ARP claims stretching as far back as 2008.
No time to wait
This prior-years claims backlog will be just one factor stinging their pockets in 2011, if the ARP reforms aren’t brought forward.
Screech says: “Another area of concern is the proposal to defer any change to the funding of the ARP until 2012. The consultation paper details the distortion to the market that is arising as a result of insurers having to fund the shortfall arising from claims against firms in the ARP.
"For example, for the 2008 year, this is currently running at approximately 20% of the total market premium. Zurich is concerned that if this issue is not addressed in time for 1 October 2011, then the stability of the market in 2011 will almost certainly be compromised and the profession could be facing an even more difficult renewal."
Calls for abolition
Another advantage to scaling back the ARP is that it will end the row over ‘minimisation techniques'. Accusations have been flying that some underwriters are using these techniques to reduce their exposure to the ARP.
Clear Management professional risks director Daniel Innes says the simple solution is to get rid of the ARP immediately.
Innes says: “I think abolishing the ARP would be good for the industry.”
Innes said that multiline brokers would benefit from the abolition, but that those with a PI specialism would lose out, adding: “Those geared up to do SPI on one day and then get rid of their staff will find it a struggle.”
It's all political
So, for once, brokers and insurers are singing from the same hymn sheet: they’re telling the SRA to get its act together and step up 2011 reforms, but more importantly, reform the ARP now.
The SRA, though, will be under pressure not to force law firms to close down if they can’t get PI.
The SRA’s reputation in the industry could be seriously damaged. Although there may be signs that they agree with insurers, it’s much harder to take the right actions. Essentially, it’s politics.
And politics rarely ever comes good.
