This autumn has seen by far the most difficult professional indemnity insurance renewal for many years.

The number of firms in the assigned risks pool (ARP) – the system under which solicitors who have been unable to obtain insurance on the open market are given temporary cover to enable them to stay in practice – rose from 26 in 2007/08 to 166 in 2008/09, and will probably be around 300 in 2009/10.

The ARP was established as part of the current market-based compulsory scheme that was introduced following a decisive ballot of the profession in 2000. It is underwritten by all the qualifying insurers as a condition of participation in this market.

In the light of the increasing numbers of firms entering the ARP, it is hardly surprising that the profession, the insurers, and the SRA are all concerned about the cost of the scheme caused by high claims in relation to the value of premium income. The profession is concerned about whether the costs of the scheme are increasing its premiums. The insurers are troubled by their lack of control over exposure to the ARP – it represents an open-ended and volatile commitment – and the high default rates (in some indemnity periods, less than 30% of the premium due has been collected). And we, as the regulator, face the issue of dealing with a large number of potentially high-risk firms, most of which may eventually have to close, and share the concern about costs – costs falling on the profession at a difficult time, which may then be passed on to clients.

Most of the firms in the ARP are sole practices or two-partner firms. Their premiums are up to 27.5% of gross fees, an enormous financial burden. It has been argued that lower premiums would lead to a lower default rate – but that could make the ARP more attractive to firms, particularly those looking to close.

There is a concern that the ARP entitles high-risk and failing firms to stay in business for a while, potentially causing problems for clients and generating more claims, when it would be better that they were closed.

The counter-argument is that the ARP is worthwhile because it throws a lifeline to firms that then are able to survive. That argument is weakened by the low number of firms who, having been in the ARP for a period, subsequently obtain market cover and continue in practice.

We have launched a consultation on radical changes that would take effect in 2010/11. The paper explains how the ARP works and provides extensive data. The proposals have benefited from considerable input from the Law Society and the insurers.

Our work has been carried out with the following assumptions: that any reforms to the ARP must maintain or enhance the protection given to clients; that they should minimise the costs to insurers and the profession – costs that are ultimately borne by the consumers of legal services; and they must be fair to the profession. Our twin objectives are to preserve client financial protection and to maintain a competitive market for professional indemnity insurance.

The professional indemnity insurance scheme works well overall. It provides a high degree of protection to the public and the profession at a comparatively low cost, especially when compared with the cost 10 years ago. Its coverage is broad and comprehensive; there is no limit on the number of claims; and the minimum sums insured are substantial.

However, the SRA’s view is that the high cost of the ARP is putting the overall scheme under stress. The ARP is costing a huge amount of money but demonstrating little benefit. Unless urgent action is taken, the situation can only get worse.

The SRA is proposing three options for change to take effect from 1 October 2010, though the second and third fall away if the first is adopted.

Our first proposal is that firms will no longer be able to enter the ARP, but that firms that are in the ARP on 30 September 2010 will be entitled to remain in the ARP until they cease to be eligible to be there. This is the SRA’s firm recommendation to alleviate the pressure put on the current arrangements by the ARP, though we have more work to do on assessing the consequences of making this radical change in a short timescale.

Our second and third proposals would effect some improvement, but in our view are not a long-term solution.

They are that new firms will not be eligible for an ARP policy and that the maximum time for any firm in the ARP is reduced from two years to one.

Regardless of which are implemented, it is clear that a significant cause of the problem is the difficulty which many firms in trouble have in closing down in an orderly fashion. There is a strong case for making mergers and acquisitions more attractive, so the SRA is also consulting on whether the definition of a successor practice can be made more flexible. This is also to be found on the SRA website.

Peter Williamson is chair of the Solicitors Regulation Authority