The single renewal date for professional indemnity insurance (PII) should be scrapped, and there should be an investigation into whether more regulation is needed in the conveyancing process, according to a ‘root and branch’ review of client financial protection commissioned by the Solicitors Regulation Authority.
The independent study, conducted by consultants Charles River Associates (CRA) on behalf of the SRA and published today, recommended that the regulator conduct a general investigation of the conveyancing process to determine whether more stringent regulation is required, owing to ‘evidence of market and regulatory failures’, and the fact that conveyancing accounts for 50% of PII claims.
The report recommended that the open market model and assigned risks pool (ARP) be retained, in part because the system saved the profession £2.1bn between 2000/01 and 2008/09 compared with the solicitors’ indemnity fund model.
It also recommended that firms in the ARP should be assigned cover by insurers on an individual basis, rather than being forced to pay a punitive, set premium. CRA said this would alleviate the concerns of ethnic minority firms, which make up a higher-than-average proportion of ARP firms.
The SRA commissioned the report in July to consider the different structural models that could be used to deliver PII, and the makeup of the terms and conditions for PII. The regulator said it is considering the report with a view to entering wider consultation in December. Changes could be implemented for the 2011/12 renewal period.
‘None of the market failures identified… are solved through the use of a single renewal date,’ the report says. ‘This alone indicates that there is no reason to restrict the market in this way.’
Scrapping the single renewal date would reduce the cost of insurance for all and ‘significantly’ reduce the number of firms falling into the ARP, the report suggested.
The research recommended that the minimum PII terms and conditions should apply only to individual clients, and not corporate clients. CRA suggested that this would: reduce premiums for non-conveyancing firms; increase the number of firms able to obtain cover in the open market; reduce the number of firms that ‘dabble’ in conveyancing; reduce the number of firms on lender panels; and reduce the value of claims paid through the ARP.
The report also recommended that the ARP should be funded through a levy on premiums, and that firms in the ARP that do not pay for their insurance cover should be closed immediately.
Kate Carr, assistant director of markets and regulation at the Association of British Insurers, said: ‘This report clearly highlights the value of a competitive insurance market for solicitors’ indemnity insurance. But it also highlights what we have long argued for – fundamental change to how this market operates to ensure a sustainable future for solicitors’ indemnity insurance.
‘This market cannot tolerate periodic crisis, caused by a combination of poorly enforced regulation and restrictive policy requirements, such as insurers’ requirement to stay on cover when premiums are not maintained, and exacerbated by significant increases in claims in recent years. Over 350 solicitor firms are now in the assigned risks pool and this is simply unsustainable.
‘We hope this report will spur the legal profession into working with us to ensure that these overdue and urgent changes can be introduced to bring stability and sustainability back to this market.’
The report is available on the reports page of the SRA website.