Last February, shortly after the Solicitors Indemnity Fund (SIF) announced that it had a total shortfall of more than £400 million, the Law Society's policy committee established a group to review whether the SIF should continue, or whether the profession's indemnity insurance needs should be met in a different way.

The group consisted overwhelmingly of solicitors independent of the Law Society's Council, together with two experts from the insurance world, neither of whom had any connection with the Law Society.

The solicitor members of the group shared a deep concern -- amounting in some cases to anger -- at the enormous shortfall which had accrued.

For us, this was a matter of practical, rather than theoretical, concern as we will all have to pay the additional contributions required.After just less than a year's work, the group published its report this week.

Its first conclusion was that there is no perfect solution which will combine the lowest possible annual cost with the certainty of avoiding an additional levy if things go wrong; nor one which can guarantee to provide the most economical arrangements for all firms.

Maximising individual freedom of firms to choose is not consistent with minimising overall costs for the profession.The group's first task was to consider whether indemnity insurance should remain compulsory.

It concluded that it should.

There is a clear need in the public interest for indemnity insurance to protect private individual clients.

The case for requiring insurance for commercial clients is less strong.

However, the review group concluded that there were few practical benefits to be gained from removing the requirement in the case of commercial clients -- but considerable administrative complexity -- and that it was thus preferable to retain compulsory cover across the broad spectrum of work undertaken by the profession.The group agreed on a number of principles which should be followed in any arrangements for indemnity insurance:-- To transfer the ultimate underwriting risk outside the profession itself and thus to avoid exposing the profession to unlimited liability;-- To attempt to replicate levels of contribution from individual firms which would be charged by commercial markets, and thus:-- To involve as little subsidy as possible by those with 'good' claims records to those with 'bad' claims records;-- To provide security of cover to individual solicitors (so that, in particular, there is no risk of claims being repudiated for innocent non-disclosure);-- To provide cover at as low an overall cost to the profession as possible;-- To encourage the avoidance of risk and the prompt reporting of possible claims.The group examined the present SIF arrangements and the possible alternatives for the future, against these criteria.

It concluded that the SIF in its present form falls some way short of what is required.

In particular:-- Risk it not transferred out of the profession, because for several years the SIF has not taken out re-insurance;-- There is (and has been for many years) a substantial subsidy from larger firms to small firms.

The largest firms have consistently paid significantly more into the SIF than their claims record would justify;--An insufficiently commercial view is taken of practitioners with poor claims records.

As a result, the discounts available to those with good claims records are lower than they could otherwise be;-- There is no freedom of choice for firms, at least so far as the minimum level of indemnity is concerned.These failings are not necessarily the fault of the existing or previous SIF management.

They result to a large extent from the unsatisfactory relationship between the SIF and the Council.

The Council too often is asked to make judgments about issues such as whether particular levels of claim loading are acceptable, when the principle should be that the profession's insurer should follow commercial principles.

Nevertheless, it was clear that significant changes to the way the SIF operates, and to its relationship with the Council, would be necessary if the SIF were to follow the principles the group has set out.The group's report sets out three main options for the future:-- Introducing a system of approved insurers, under which each firm could choose its insurer;-- The reintroduction of a master policy;-- Continuation with a mutual-type fund reformed as the group proposes.The overwhelming weight of the evidence the group received was that, all things being equal, the most economical system for the profession as a whole would be a mutual-type fund.

That does not mean that it would necessarily be the case for every firm.

Because the fund cannot underwrite firms individually, but must determine contributions according to rules, there will always be a few firms at any one time for which lower rates will be available in the market.One key question for the profession and the Council is whether it remains legitimate to continue with arrangements which deprive firms of freedom of choice (in some cases costing them money) in order to provide a substantial overall benefit for the profession as a whole.

The majority of the review group believes that, provided the fund operates on a commercial basis with no systematic cross-subsidy, the best solution is to retain a mutual fund, rather than abolish the concept.

The multiple fund proposal sets out how a reformed fund might operate (see pages 1 & 4).

My group has completed its work.

It is now for the Council to decide on the arrangements for the future.

I know that before doing so, the Council will want a wide and detailed consultation with the profession.

There is no benefit for the Law Society or the Council in having one indemnity insurance arrangement rather than another.

The question is what best serves the needs of the profession, whilst continuing to provide the necessary protection for the public.