PII special: pooling resources
One of the major challenges we have faced in recent times as a public interest regulator has been to ensure that we have professional indemnity insurance (PII) arrangements in place which provide the required level of consumer protection and are sustainable for the long term.
Last year we made the decision to overhaul the current system, with the phased closure of the assigned risks pool (ARP) at the centre of the changes. It had become clear that the ARP system was no longer sustainable, and was significantly hampering the operation of a competitive and sustainable market for solicitor PII.
So what will the new system look like?
- The amount of time a firm can stay in the ARP has now been reduced from 12 to six months.
- From October 2012 to October 2013, the ARP will be funded by the profession and qualifying insurers in an agreed, alternating layered approach of £10m tranches. The profession’s contribution for 2012/13 will come from the Law Society, which will be provided by releasing funds from the Solicitors Indemnity Fund.
- In October 2013, the ARP will cease to provide policies of qualifying insurance and will be replaced with a system where insurers offer a three-month extended policy to firms which cannot obtain PII for the following year. A firm may continue to practise while it attempts to obtain a qualifying insurance policy for the first 30 days of the extended indemnity period. For the remaining 60 days, ‘the cessation period’, the firm may only work on existing instructions, and while it attempts to find insurance, or conducts an orderly closure of its practice in the case that insurance is not obtained.
- The single renewal date will be maintained until October 2013 to facilitate the transition but is then likely to be removed.
- The existing ‘side arrangement’, whereby coverage is provided to uninsured firms that have not applied or are not eligible to enter the ARP, will be withdrawn with effect from 1 October 2012, and instead claims arising from such firms will be met by the Compensation Fund.
- For the 2012 renewal and onwards, insurers will be required to disclose their credit ratings in the interests of transparency.
Our view is that implementing these arrangements will: create conditions that increase the likelihood of existing insurers remaining in this market; boost the number of new insurers entering the market; and encourage greater levels of competition for business between them, while continuing to provide redress when something goes wrong.
We have opted for a phased approach to closing the ARP to ensure a smooth transition and stability in the PII market. This has meant that for us to facilitate changes to the professional indemnity arrangements that will take place on 1 October 2013, changes have needed to be made to the indemnity period starting on 1 October 2012. This is to mitigate the consequences that it may have on the market during this time and ensure the profession and insurers are not at risk of increased liabilities.
While seeking to put a system in place that ensures protection for clients and sustainability in the long term, we have also taken steps to increase the transparency of the information that firms receive about qualifying insurers. Although it is not the role of the SRA to regulate qualifying insurers, they need to provide better information to the profession, including financial strength information. We were encouraged by the overwhelming support for the introduction of the requirement for insurers to disclose credit ratings - and from October 2012 all qualifying insurers will need to make this information available.
At the heart of these changes is the principle that the best way of ensuring client protection is through a competitive and open insurance market.
That said, we will be carefully monitoring the effect these changes have on the market. We have also put new systems in place for insurers to alert us at an early stage where firms are experiencing problems. This means we can provide early support to firms and, where necessary, protect consumers from a sudden and disorderly closure, which is consistent with our risk-based approach to regulation.
Richard Collins is executive director at the Solicitors Regulation Authority
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