A risky business

From this week The Solicitors indemnity fund is no longer, but the open market is struggling to take its place.

Excess demand and inexperience have fuelled the confusion.

Sue allen reports

As the Solicitors Indemnity Fund (SIF) slides into history and reports come through of a commercial market 'in chaos', solicitors may well be wondering what has hit them and what lies ahead now they are own their own.

Despite months of preparation among insurers and brokers for the day 250 million of solicitors' premiums hit the open market, it is clear that many firms left it to the last minute to get quotes.

Brokers and insurers were snowed under by work.

With just over a week to go, rumour was that insurers would be unable to get cover in place for firms by the 31 August deadline.

Martyn Roffey of Aon says: 'Irrespective of the fact that some qualifying insurers were well organised, because of the single time deadline, the sheer volume of work coming in caused enormous problems'.

This is a concern mirrored by Steve Roberts of approved insurer Zurich.

Despite his company putting on 'four times the staff and working seven days a week', with 9,000 firms arranging insurance to start on the same day there has been a 'finite resource' within the industry to cope with the demand.

Some have queried how well the Law Society has dealt with the change.

Mr Roffey says although the original decision to go to the commercial market was taken in good time, it was then a long process until the list of qualifying insurers came out.

'There was definitely insufficient time for the the competitive market as a whole to get itself in order,' he says.The Law Society's director of policy, Russell Wallman, says that although the timetable was 'tight', once the profession had voted to move away from the SIF the Law Society's view was that it should be done as soon as possible.

One thing which has become clear over the last few months is that this is virgin territory for insurers and for the profession alike, and that inexperience has led to mistakes.

At the start of August, gossip among brokers was that one insurer had got it wrong and was vastly undercutting other insurers, a practice which was quickly halted once the chief underwriter came back from holiday.

Before that, the insurance market found itself in a Mexican stand-off.

As the Law Society's joint venture insurer St Paul - which undertook to quote to all sectors of the profession - held back in starting to quote, so did others who were waiting for the 'benchmark' to be set.

This pushed the timetable further back for firms.

Peter Elliott of St Paul says that the 'slowness of the profession' in finding its insurance was partly caused by 'a function of the timing of our quotes, because almost all other insurers were waiting for us to set the level'.

Eric Franz of approved insurer CGU says there was also a problem with the release of preliminary figures from the SIF, vital market intelligence for companies with no experience of the legal sector.

The information came 'too late in the day' for insurers to build up the necessary information before going to the profession.

Inexperience also led to huge variations in quotes, which increased confusion.

Recent premium comparisons on broker PYV's Web site showed one nine-partner London firm with a good claims record quoted premiums of 92,000, 110,000 and 178,000 in contrast with 200,000 paid to the SIF in 1999.

Another example showed a two-partner London firm with a good claims record being quoted 5,000 and 2,667 on the open market in contrast with a 1999 SIF contribution of 22,000.

Despite numerous attempts by brokers and insurers to fuel the market into a feeding frenzy by citing likely savings on the open market of 50% or more, the more cautious stuck to their guns and said there would be 'winners and losers' under the new regime.

In the City, Perry Simson, the partner in charge of Clifford Chance's professional insurance, says his firm made a 'fairly substantial six-figure saving' on its premium, largely due to 'restructuring its global insurance arrangements'.

Freshfields' managing partner Ian Terry reports that his firm has also made savings, while Michael Seymour, the partner in charge of professional indemnity at Lovells, says its commercial policy is 'no more expensive than before'.

However, when looking for losers, it is clear that firms with poor claims records or those dealing with practice areas which often generate claims - such as personal injury and conveyancing - will be the ones to suffer.

PYV's Web site provided numerous examples where insurers had declined to quote or where premiums would be higher than those paid to the SIF.

Kelvin Curran of broker FirstCity also warns that sole practitioners are likely to have lost out.

Commercial insurers look for minimum premiums, usually of between 750 to 1,000; the premiums for some small turnover sole practitioners will be below this, which makes it uneconomic for insurers, he says.

Despite the feeling among some sole practitioners that they are being squeezed out the market, Sole Practitioner Group chairman Peter Williams says the 'general impression' from its members is that open-market insurance will prolong the life of the sole practitioner rather than shortening it 'because they could compete on their own merits'.

One of the most serious misjudgments, however, has been on the part of the profession, many of whom left it too late to get insurance sorted out.

With backlogs mounting, firms which failed to get their insurance in order could find themselves by default in the assigned risks pool (ARP), which is for those firms that have failed to arrange insurance for whatever reason.

Designed with punitive premium levels, this will be a painful lesson to learn.

Firms applying to enter the ARP will pay on average 25% of their gross fee income for the first 500,000 of fees, with percentages banded thereafter.

For those which go in by default, they can add an additional 20% to the total premium by way of a hefty rap on the knuckles.Firms could face a further penalty if they do not have commercial cover in place by 1 September but fail to apply to go into the ARP.

Under the ARP rules, firms stand to be charged a full year's premium with no refund even if they then secure commercial insurance.

Those firms which applied to go in - but not those which ended up there by default - will get an 80% premium refund if they apply to leave the ARP within a month and a 60% refund in the second or third months.

However, Mr Wallman says firms may apply for waivers.

Although the exact number of firms ending up in the ARP will not be known until practising certificate renewal is finalised later in the year, estimates have been put as high as 700-800 firms.

Law Society estimates are around 200.

FirstCity's Mr Curran is critical of what he says was the Law Society's failure to provide firms with clear information on how to apply to go into the ARP.

Mr Wallman says he would not expect firms to apply to the ARP until they had tried and failed to obtain commercial insurance.

He adds that information was already available on the Law Society's Web site and that a letter was going out to firms from ARP managers Eastgate this week.Former Law Society President Michael Mathews, who guided the move from mutual to commercial insurance, says that despite some firms losing out in the new arrangements, the SIF had become 'unsupportable' because of a lack of faith in the profession.

'Those firms which cost the SIF a lot of money will not cost the market those sums because it won't bear it.

Those firms have the choice between getting better or shutting up,' he says.

And the lesson for the future may be an equally tough pill for the profession to swallow.

Insurers and brokers alike agree that it is a good time for the profession to enter the market because it is a buyer's market.

However, a repeat of the early 1980s, where a flood of claims led to a hardening of the market, could again see reinsurers getting nervous, thereby reducing capacity.

A stark example of this is provided by Mr Simson, who says Clifford Chance's top-up insurance dropped from 125 million in 1982/83 to 50 million a year later when primary insurers no longer had the capacity to write business because of a lack of reinsurance.

For firms, this would mean dealing with an insurers' market with fewer providing cover and premiums going up.

Even before the SIF formally slid into run-off cover this week, there were those who questioned whether firms knew what they had lost.

Katherine Mellor, the senior partner of Elliotts in Manchester and a member of the Law Society's task force which considered the profession's insurance options, says the commercial market will 'be a shock for the profession'.

She accepts that the SIF made mistakes, but says the profession opted out of it without knowing enough about the consequences.

She warns: 'The profession will lose the cradle-to-grave service and for many the market will be much harder.'