Balancing the risk

Leading figures in the field of solicitors’ professional indemnity insurance met at a roundtable discussion to chart how the market has matured – and who are the winners and losers. This is an edited version of that conversation


After a year that has seen premiums for the compulsory £1 million layer of professional indemnity insurance fall again the move to the 1 October renewal deadline (see [2004] Gazette, 9 December, 5), Alexander Forbes Professions gave the Gazette exclusive access to a roundtable discussion in London on the indemnity market.


Chaired by Mike Lord, director of London-based PR company Broadgate, the participants were:


• Andrew Paton, partner at national firm Pinsent Masons;

• John Verry, director of AFP Consulting;

• Martin Ellis, director of Alexander Forbes Professions;
• Paul Cusition, general manager – financial and professional services at St Paul Travelers; and

• Gazette Editor Jonathan Ames.


This is an edited version of the discussion.


Mike Lord: Is this the year that the solicitors’ professional indemnity insurance market finally came of age, in terms of premiums, choice of insurer, risk management and claims?

Ellis: larger firms are more sophisticated Martin Ellis: It’s difficult to judge who’s actually winning and who’s losing in terms of premiums. If you take the top 100 firms, the underwriting of those is completely different to that of a sole practitioner. Yes, there was a reduction overall, probably about 6 or 7% to circa £234 million. The larger firms that got reductions achieved them by moving insurer. Paul Cusition: Yes, premiums are down, 4% or 5% in real terms. There were some rate reductions where firms have a good claims experience and were prepared to be aggressive about the marketing, and there were one or two new insurers in the market. A number of insurers are very focused in terms of the segment they target and have an appetite for. Also, if you looked back at the list of qualifying insurers from year one, there are only about 25% of qualifying insurers that are still there in year five. Martin Ellis: Because of the dynamics of the profession, there is different buying criteria. The larger firms are more sophisticated in relation to their purchasing requirements – the premium is not always going to be the driving force, it’s going to be the service that is derived from that insurer, the experience they have on claims handling, and so on. It is far too important – the third largest overhead for most firms – so you can’t treat it like car insurance, where you going to move from year to year. A sole practitioner, of course, has got a different buying thought process. I don’t blame them for that; there are only few options for them anyway, and if they can save up to £10,000, it comes straight off their bottomline as fee income. Andrew Paton: I’m sitting here today with my broker for the purposes of this year’s renewal, and the insurer who carried the primary £10 million risk – did I get a sense of there being any more competition this year? No, I don’t think so, but I’m very much in the hands of brokers we employ. I know that we spoke through the broker to other insurers, obtained expressions of interest, and in some instances those expressions of interest carried with them indicative premiums, which were less than the premiums being proposed by the insurer that we eventually went with. Part of the reason why we decided to go with the St Paul was that we have been with the St Paul ever since the market went open. As a substantial top-20 law firm (£96 million turnover) we value the relationship that we have with our insurers. And while I daren’t say that I’m prepared to stick with that relationship at any price, because at some point the price difference will be too much, I’m not simply buying on price – I’m buying in relation to our service that we’ve enjoyed historically, the value of the relationship that I’ve got, the service that I anticipate getting in the future. From Pinsents’ point of view, I did not see a reduction in the cost of our primary insurance (which we consider the first £10 million). The premium for the top-up was slightly less than it was last year, but there wasn’t a great deal in it. Mike Lord: One of the aspects that is key to renewal and the deal that law firms can get, is their past experience of claims, and risk management is a really important part of that. Is there something that firms should have learnt from this, or have they learnt it over the last four years? Verry: compliance may become compulsory John Verry: The reduction in premium may be good news for the profession, but it’s not necessarily good news for risk management, as some firms do in fact take their eye off the ball in so far as risk management is concerned if their premiums reduce, and it tends to be the hard market that focuses their minds on methods of trying to reduce their premium. But generally over the four years, there’s been a very large change in attitude towards risk management. In the days of the Solicitors Indemnity Fund, it was a nice-to-know subject, but there was no compulsion attached to it, and of course however bad you were, you were insured. The commercial market takes a slightly different view. There are a number of firms that are going in for it [risk management] for other reasons – that is, improved productivity, better service delivery to the client – to differentiate themselves from their competitors. But there is still a hard core that regards risk management solely as a tool to try to reduce premiums, which is short sighted to say the least. Martin Ellis: It’s [risk management] certainly become a prerequisite from a lot of underwriters. There are some firms who seriously don’t have diary systems, or they make the radical manoeuvre of actually buying everyone a desk diary for Christmas. The larger firms are obviously more sophisticated – they’re doing it because it’s actually becoming a requirement to do it from their clients, not necessarily because they want to save money on their premiums. There’s one underwriter that will not give you a quote unless you can confirm that you do partner-to-partner file reviews. Paul Cusition: I think from an underwriter’s perspective, you just need to reflect on the process that happens with 9,400 firms trying to get cover in a three-month window. Obviously you can spend more time on the larger risks, but for the smaller firms or the mid-sized firms, you’re really trying to get a sense of what goes on in the firm. So it’s things like what controls are in place when they take on new clients in terms of vetting the client, and also looking at what the client’s record is in terms of previous legal advisers. You’re also looking at how the work is divided, and how work might pass through particular departments if it’s a complicated instruction that might span more than one discipline; certainly partner reviews; how claims are managed; how complaints are managed; how claims are notified to insurers – is it a firm that notifies circumstances when they arise? It’s also looking at what happened to the claims that had arrived. The thing that personally turns me off as an underwriter is when somebody says they don’t do that sort of work anymore, or that particular fee-earner or partner isn’t there anymore. That is not actually solving the problem. The problem is – how did those circumstances arrive? Cusition: aggressive marketing can cut rates Martin Ellis: It’s also particularly important when I’m sitting in front of an underwriter, and I’ve got two firms and they look pretty much alike. But then when you actually start digging down deeper, you can point to the reason why this firm is different to that firm because of their risk management or their attitude, or quite frankly the effort that they’ve put in in relation to their presentation to underwriters. Mike Lord: Andrew, has the importance of risk management become something that you think partners are more aware of? Andrew Paton: As the risk management partner in my firm, I’ve got responsibility for the the third and fourth biggest overheads – the indemnity insurance and the excess. I think many law firms were, and many probably still are, a collection of essentially sole practitioners who are working together under the same roof, being resistant to any sort of centralised management, and doing their own thing. And part of what is involved in risk management is drawing on the best practices that are within the business – drawing them together and making them accessible to everybody so that everybody can be leveraged up to the best practice. [When I took over as the partner with responsibility for indemnity five or six years ago] one of the things that struck me looking at the previous claims that we had notified was that there were some patterns. So my first recommendation was to put in place some sort of mechanism for learning from mistakes. That developed into a wholesale review of the business – and using an external consultant we came up with the concept of the life of a file.

We created a working group that for two years deconstructed the business of Pinsents along this linear model – a life of a file begins when a telephone goes and somebody says ‘I’ve been recommended to you, I’d like to appoint you as our solicitors’, so a new matter for a new client, all the way through to archiving the file, and eventually the destruction of the papers. Our risk management document appears on the intranet and is accessible by everybody in the firm, and we know who’s looking at it, because we monitor the hits. It will answer almost any question you want to ask about how we do things, and there are electronic links through to the precedent documents.

Paton: communication vital in tackling claims

Has it made any difference to the rate at which we notify claims and circumstances? I think a little bit. Have we seen any benefit in terms of the reduction of our premium? Not obvious to me, but as an insurer said, it takes at least five years even slightly to shift the culture of a firm, so we’re sort of three years down the track and I’m hoping for something in a couple of years time. And of course what nobody can say, because we simply don’t know, is how different our position would be today if we hadn’t done all that work three years ago.

The most difficult cultural shift to achieve when we introduced [proper risk management procedures] was that we insisted that everybody should move to electronic diaries – and we banned the use of paper diaries. Five years ago, 20% of our notifications related to missed time limits, and I don’t think that it’s nearly so many now.



John Verry: You see a lot of evidence of firms working either on the basis of practices within a practice, or a number of sole practitioners working under one roof. With partners, sometimes there is a fear of IT. Firmer action may be called for with regard to partners who simply won’t change because they think they are above it and don’t need to. Some firms re-train partners, others [have to attach] financial penalties so if they fail to show compliance with procedures, their drawings will be penalised



Martin Ellis: Risk management has got to be a no-brainer, because if it can preserve reputation, it maintains clients.



John Verry: The cost most people dismiss is reputational risk. You can insure the cost of your claims, you can finance the cost of your deductibles, but you can’t insure your reputation.



The other point is that we talk about claims and what are the obstacles that you need to overcome with risk management, but lawyers will think that you’re going to criticise them for their interpretation of the law, or their practise of the law.


The vast majority of claims is nothing to do with the interpretation of the law. It’s how the practice is managed, how diaries are managed, and how the business is managed, and it’s the mistakes that rise from that, that give rise to the negligence claims.


Andrew Paton: If I could identify one word that applies to the majority of claims and circumstances that I have to notify, it’s communication. It’s the communication between the partner and his team who are servicing the needs of the client, or the communication between the lawyer and the secretary, or the communication between the lawyer and the external client. It’s not scoping the work with sufficient clarity, it’s not buttoning down what it is that we’re going to do and what we’re not going to do. It’s not buttoning down what the timescales are, what its expectations are – and it’s giving rise to false hopes and expectations.


Another project that Pinsents has embarked on at the moment is trying to improve the skills that our lawyers have got on project management, so that people aren’t fire-fighting, but have an idea at the beginning of the job what’s entailed, who’s going to be doing what, what the timescales are, what the reporting lines are, who’s going to manage the relationship with the client.


We have had a difficult situation with a client where it was a corporate transaction with a large property owner. The corporate lawyers weren’t really talking to the property lawyers, and so these things were running at different speeds and the reporting lines to the client were blurred. The client wasn’t quite sure who was doing what at the time and was getting upset.


This is something we recognise we need to improve on.


Mike Lord: Does risk management feed through into savings in premiums?


Paul Cusition: There isn’t an algorithm that you could apply to risk management where you could tick a box and say that’s X per cent, that’s Y per cent or whatever. But when you’re trying to differentiate on a risk selection, from a pricing point of view, many firms that on the face of it look the same, those that have established risk management practices and don’t just say they have them are going to fare better, whether they’re claims free or not claims free.



John Verry: It’s important that firms are able to demonstrate to the underwriter that they’ve identified their risk profiles, and the risks that attach to the type of work that they do, and that they’re managing those risks after having analysed them.



But firms have to be very careful about approaching this in a blinkered manner – that they’re simply looking at a way to save on the insurance premium. There are a number of very important issues [such as money laundering] that, if they don’t manage them, could potentially be more serious because, of course, they carry a criminal penalty. You need to know about disability access to the premises, you need to know about discrimination policy, you need to know what your professional rules say.


Andrew Paton: The danger is that risk management can become the end and not the means and I think that risk management has got to provide a safe working environment, but it mustn’t be allowed to bear down on the entrepreneurship. That’s quite a difficult balance.



Jonathan Ames: Is the market here to stay? Is the idea of the mutual now completely consigned to history?



John Verry: I think the open market has worked for the profession and if you look at the volume of premiums being paid now by the profession and you account for inflation, the profession is still paying less than it was in 1999. I don’t see any reasons for a mutual concept to return.



Martin Ellis: It [the market] has been an overwhelming success. There is only a very small number of firms in the assigned risks pool. I remember five or six years ago predicting that 10% of the profession would really struggle to get insurance.


In the year 2000, only 41 firms went into the assigned risks pool out of 9,000 – that’s quite dramatic and I think the commercial insurers have in some respects turned into policemen for the Law Society. One question I have is whether compliance/risk management is going to become a compulsory requirement for the legal profession?



John Verry: I think that it may well do under the new rules depending on how you interpret some of the rules relating to supervision of management and to be able to demonstrate that you have systems and procedures in place.



Martin Ellis: There are a number of law firms out there that haven’t even started to begin to think about compliance and risk management per se – and they are almost going to be left behind. And if it ever gets to the stage where a regulatory body can turn round and actually say ‘your practising certificate is now withdrawn because you haven’t complied with this system’, they probably won’t get indemnity insurance ever again.



John Verry: If you look at the history of the legal profession’s insurance arrangements, there was no obligation to insure up until 1975 and since then it has been through the master policy, the mutual, and back to the open market. They’ve really run out of options. They’ve got to a position where it’s got to work, because all other forms of arrangements for the profession have arisen out of crisis.