Protecting consumers by ensuring effective professional indemnity and compensation fund arrangements is a key objective for the Solicitors Regulation Authority. Currently, financial protection is achieved through a combination of two arrangements: compulsory professional indemnity insurance (PII) and the compensation fund.
The PII scheme requires all firms in England and Wales to have an insurance policy which has been approved by the SRA. One element of compulsory PII is the assigned risks pool (ARP). This protects clients by providing insurance for a short period to firms that find it difficult to obtain cover from the open market, yet it is a system that has worked to the satisfaction of few.
Following an extensive root and branch review of the current financial protection arrangements by the SRA it was clear that, if the status quo continued with the ARP, the PII system would be at risk of collapse.
The SRA engaged extensively with the profession, representative groups and the insurance industry as part of this review so that we were able to come up with a system that would put financial protection on a sound footing for the long term. We recently announced a staged approach to changing the arrangements for client financial protection.
We have come up with a new system that will deliver greater competition and choice within the market, should reduce the overall cost of PII and will maintain the very high level of client protection we require in the public interest. The PII market provides a high degree of client financial protection. It is the ARP which is at the centre of the changes, which are:
- In October 2011, the amount of time a firm can stay in the ARP will be further reduced from 12 to six months;
- For the indemnity year from October 2012 to October 2013, the ARP will be funded jointly by qualifying insurers and the profession, with liability from claims arising from law firms who have not taken out insurance moving from the ARP to the compensation fund; and
- In October 2013, the ARP will be abolished and replaced with a system where insurers offer a three-month extended policy period to firms which cannot obtain PII for the following year. The single renewal date will be maintained until October 2013 to facilitate the transition but will then be removed.
However, one thing is certain: the current arrangements for PII are at risk of collapse if we carry on as at present. Two recent developments have highlighted the need for a fundamental overhaul of existing arrangements.
First, the number of firms in the ARP has risen significantly, from 26 in 2007/08 to 298 in 2010/11. Ten years ago the annual cost of claims on the ARP – ultimately borne by the profession – was £9m; this has risen to around £50m today.
The second development is the risk associated with having a large numbers of firms covered by one insurer. The ARP is distorting the market, causing insurers to exit the market, providing a barrier to the entry of new insurers and causing existing insurers to constrain their market share rather than competing for new business.
Most of the firms in the ARP are small with up to three partners. Yet it is these firms whose choice in the current market is most constrained as a result of the impact of the ARP on insurers. These smaller firms have a very limited choice of insurers. This reduces competition, distorts the market and increases premiums.
In addition, the majority of firms who are able to obtain insurance have around 15-20% added to their premiums to pay for the ARP.
By replacing the ARP, new companies will be attracted into the market, offering greater choice and competition. We believe that it is this open market that is best for clients and the profession.
We have consulted and engaged widely with BME representative groups, some of whom worry that some of their members may have difficulty in obtaining insurance under the new system and no longer have the ARP as a safety net. However, it is my view that such firms will be in a far stronger position to obtain cover under the new system as more insurers enter the market. We also need to remember that most BME firms are not in the ARP, and these changes will bring significant benefits to them through a greater choice of insurance provider and lower premiums.
We will, however, continue to work closely with insurers and BME representative groups to address these concerns and ensure all members of the profession are treated fairly.
We have also been asked why we are waiting until 2013 for the ARP to be replaced. There are good reasons for this. Our indemnity rules and agreements with qualifying insurers need to be revised to make arrangements for the three-month policy extension period firms will have under the new arrangements to secure renewal or close down. These arrangements have to be in place for a full year before the ARP is abolished.
In addition, during our consultation the profession told us that they would need time to prepare for the changes, and we believe this is best achieved through a well-planned and staged transition.
Satisfying everyone was always going to be difficult, but I firmly believe the new system offers the best way of ensuring client protection through a competitive and open insurance market.
Full details of the new arrangements can be found on our website.
Richard Collins is director of standards at the SRA