Posted by Michelle Garlick, a partner in the professional risk team at Legal Futures Associate Weightmans LLP
Garlick: insurers will be reviewing their risk assessments and underwriting criteria very carefully
On 13 April 2011 the board of the Solicitors Regulation Authority (SRA) approved key changes to the arrangements for client financial protection following an extensive consultation process for what are long-overdue reforms.
The key changes to the assigned risks pool (ARP), the “last-resort” insurer, have been met by a mixed response from the legal industry and its insurers. Currently it is funded by a percentage of the professional indemnity premiums paid by law firms to their insurers and is available to firms that fail to secure professional indemnity cover on the open market.
However, from October 2012, the ARP will be jointly funded by qualifying insurers and solicitors and, from this October, the amount of time firms are able to spend in the ARP will be cut from a year to six months.
These are all part and parcel of transitional arrangements which will result in the ARP being closed in October 2013 and replaced with a new system whereby any firm unable to secure insurance from the open market will have a further 30 days to secure insurance following expiry of their existing policy and if this is not possible, will then have a further 60 days to effect orderly closure. If the firm closes, then the existing insurer will be liable for providing the run-off cover.
The ARP has clearly been viewed as the chief cause of problems in the market and it seems to have been universally accepted in the consultation responses that change was needed. After all, it is not the SRA’s job as regulator to provide an insurer of last resort to help those firms who can’t get PII cover stay in business.
The SRA says these proposed changes to the ARP will ensure client protection is maintained through a competitive insurance market. It accepts the insurers’ submissions that the ARP has had a distorting effect on the market and that therefore the solution is to take away the distortion, but it is not willing to remove it as quickly as insurers would have liked.
The Association of British Insurers warned that the closure of the ARP needed to happen this year and the delay will inevitably mean that some firms will face the same difficulties as they may have faced over recent years in finding cover for October 2011.
The arrangements will also mean that insurers will be reviewing their risk assessments and underwriting criteria very carefully indeed in preparation for the prospect of being stuck with providing run-off cover for firms. This reinforces the importance for firms to be taking steps now to present themselves in the best possible light to insurers and to ensure that they are doing all they can to minimise risk.
Whilst the cost of funding the ARP is to be shared between the profession and insurers as from October 2012 (in an attempt by the SRA to mitigate the concerns of insurers whilst the ARP remains during the transition period), the SRA hopes that the potential liability both for insurers and the profession will be capped in real terms, although the detail of what is to happen in this regard is to be open to further consultation.
Funds are still available from the Solicitors Indemnity Fund which will be used first and thus hopefully limit the potential exposure to an additional levy on the profession.
Inevitably, it was always going to be difficult for the SRA to get the right balance between the profession’s needs and the insurance market’s demands, and you can never please everyone all of the time.
Whilst change is not going to happen as quickly as insurers would perhaps have liked, change will indeed take place and given all the other major changes which the SRA is having to address, it is perhaps not surprising that they have chosen a staged approach rather than introducing radical change all in one go.
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