With premium quotes for the smallest practices rising by sizeable amounts, we need to take a long look at why we’ve arrived at what seems to be a two-speed solicitors market.

Parallel MarketsThe problem of solicitors’ practices failing to secure professional indemnity insurance by the renewal date is clear once we look at the number of firms entering the assigned risks pool. With 27 firms in 2007/08, almost 150 firms in 2008/09, and a further big increase predicted this year, we are clearly facing a crisis in the way this market operates. And this is a market familiar with cyclical crises, as the failure of the Solicitors Indemnity Fund in 2000 demonstrates.

Faced with a sharp rise in claims and the lack of an adequate regulatory response to clear indications that many small firms are struggling to limit their exposure to risk, insurers are now very wary of those practices that seem to pose the biggest risk. Meanwhile, larger firms are benefiting from strong competition for their business, with more than 25 insurers in the market. There seem to be two parallel PII markets operating.

The problems that have arisen can be divided into three broad areas.

First, the economic climate. The relatively benign claims environment of the middle part of this decade ended in 2007, coinciding with the housing crash. Massive, organised mortgage fraud was exposed, leading to a significant rise in the number and cost of claims from lenders left with properties worth a fraction of the amount they lent. The recession in general has left solicitors further exposed to claims.

Second, the terms of the policy that governs the market meant insurers could not respond to the claims explosion by tightening terms and taking action against fraudsters. Any solicitors' practice closed down for fraud is left with six years of cover, with their insurer a sitting duck for claims. Insurers cannot take action against policyholders for non-disclosure, misrepresentation, fraud or non-payment of premiums, and the ARP is another cost that has to be met by insurers. Clearly these factors leave insurers exposed.

Third, a failure of regulation. The solicitors’ profession has no more bad apples than any other, but dealing with them has seemed an impossible task. With little response to the issues highlighted by the credit crunch or other systemic issues, and no likelihood of action, insurers have had little choice but to adopt a broadbrush approach similar to that taken recently by some lenders in removing smaller practitioners from their conveyancing panels. Insurers should not have to act as a quasi-regulator – it isn’t their job, and when they are forced to do it, it can impact on more than just the bad.

So why do the insurers remain in the market? They have the choice, after all, of staying or going. The answer is that the overwhelming majority of the solicitors’ firms represent decent, insurable risks over the long-term. With the ability to treat the profession like any other, insurers see potential in the market.

The Way ForwardInsurers have been warning about the problems of this market. We have sought to engage and map out a way forward, with plans for reform to get the market back on track.

The ABI recently met the Solicitors Regulation Authority to discuss future changes, and we offered to bring ideas and evidence forward and to engage with them to discuss the changes the market needs. We are hoping that this can develop into genuine commitment to address our most important concerns for 2010.

At the heart of the reforms must be the customer, the consumer of legal services. Protecting the consumer, while ensuring that the legal profession maintains the highest of standards, through the help of insurers and their risk management expertise, is the task. Reforms to the market must focus on re-balancing the risk so that the regulatory outcomes become clearer and more effective.

The benefits of the market approach for this class of insurance are obvious, and they have worked to the benefit of the solicitors’ profession for virtually all of this decade. What we are seeing now are the drawbacks of a system that does not permit insurers to do what they are good at – assess individual risk and design a policy and a premium that fits the risk. Only by being able to do this can we hope to replace the current imbalance and make professional indemnity insurance widely available to all solicitors, regardless of their size.

Nick Starling is director of general insurance and health at the Association of British Insurers