Lloyds: row over security of unrated insurers
The Solicitors Regulation Authority (SRA) is holding firm against criticism over its position on unrated professional indemnity insurers after Latvian underwriter Balva – which covers 1,300 law firms – was prohibited from writing new UK business.
Latvia’s Financial and Capital Markets Commission told Balva on 1 March that it cannot underwrite any new business in the UK. This restriction does not affect existing policies.
The SRA has written to the firms underwritten by Balva to reassure them that there are no implications for them at this time.
The letter states that the restriction does not affect Balva’s obligation to provide cover for up to 90 days after 30 September if firms cannot renew their insurance, nor does it affect the provision of run-off cover if a firm closes without a successor practice. Firms will not be able to obtain additional policies from Balva while the restrictions are in place, so they may need to seek an alternative provider from 1 October, 2013.
Agnieszka Scott, SRA director of policy and strategy, said: “While nothing is certain, we felt it necessary to write to firms to allay any fears they had over their cover. The restriction is only on new business, so firms do not need to be concerned at this time.
“We are in regular contact with the Financial Conduct Authority and will continue to keep our eye on the Balva situation over the coming months.”
However, Ben Waterton, director in the professional risks practice at broker Gallagher London, said: “This development must surely be another embarrassment for the SRA. Once again it has failed to address the continued issue of unrated insurers – despite approving them to sell PII.
“In recent years we have seen both Quinn and Lemma going into administration… and this should serve as a wake-up call to the SRA to demonstrate stronger leadership on this issue of insurer ratings.”
He pointed to a requirement by the Royal Institution of Chartered Surveyors (RICS) that all insurers must be rated by an external rating agency to pre-defined levels to become qualifying insurers.
Articulating its stance in December 2010, the SRA said it should not seek to replicate the insurance regulator’s role. “The SRA is also concerned that any attempt to do so may lead firms to view the SRA as taking responsibility for the performance of insurers,” it continued.
“Simplistic approaches such as using credit ratings are not perfect, impose an extra cost on insurers and act as an extra barrier to entry to the solicitors PII market, leading to extra costs for the profession.”
An SRA spokesman said this was unchanged; unrated insurers are still regulated by the Financial Conduct Authority, meaning that protection for clients is in place. “If something changes, we’ll review our position,” he said. All qualifying insurers do now need to notify potential policyholders of their credit rating or if they do not have one.
Some argue, however, that for insurers authorised in another European Economic Area country, the compensation scheme of that country may apply instead.
Brian Boehmer, a partner at broker Lockton Professions, said the large number of smaller firms going with unrated insurers could be storing up problems for the future as a greater spotlight is placed on insurer solvency and capital requirements – Lockton does not place clients with unrated insurers, he said.
“Currently, in the event of an insolvency, solicitors’ practices have four weeks under SRA rules to obtain alternative cover, failing which they enter the assigned risks pool. However, claims previously notified to the insurer which have not yet been settled may not be paid potentially causing significant commercial and reputational issues for partnerships.
“Insurance is meant to offer some form of certainty to an Insured in the event they need to call on the policy. Although there can never be 100% certainty in life, the use of unrated insurers introduces yet another element of uncertainty which all businesses could do without.”
Mr Waterton added: “It is understood that a number of these 1,300 firms obtained a two-year policy which, subject to the structure of the deal, could be compromised if this restriction continues through to the main October renewal season.
“If the ban continues past that point, it would mean over 10% of the profession would be forced to find and compete for the attention of a new insurer at renewal within what is already a challenging period for firms, due to the prevailing macro economic and legal services environment.”
The Law Society recently warned that small firms are risking their future by taking out insurance with unrated providers – 16% of firms went with an unrated insurer in 2012/13, compared to 9% a year before.
The SRA has never approved insurers to write Professional Idemnity business. Any authorised insurer which signs up to the SRA’s terms can enter the market. That’s why it’s called an open market. Law firms which just take the lowest quote and/or don’t make enquiries about who their insurer is have to accept the consequences. Use a good broker and you should be ok – or at least have someone to sue.