There has been much debate and deliberation about the professional indemnity insurance market for solicitors in the last nine months.
In late-2013, we introduced the final changes as part of our Financial Protection Policy approved in 2011. This involved the removal of the assigned risks pool, which was felt to be discouraging insurers from entering the market.
Then, on 7 May this year, we set out plans for a wide-ranging programme of work to:
- remove unnecessary regulatory barriers and restrictions to enable increased competition, innovation and growth to serve consumers of legal services better;
- reduce unnecessary regulatory burdens and cost on regulated firms; and
- ensure that regulation is properly targeted and proportionate for all solicitors and regulated businesses, particularly small businesses.
The programme started with the publication of four consultation papers, one of which focused on reducing the minimum terms and conditions.
Our current client protection regime goes some way to offering redress to all consumers, but it is arguable that the cost is too high – a cost passed on to those consumers. To strike the right balance between ensuring protections are in place and making PII affordable, we proposed to:
- reduce the level of mandatory PII cover to £500,000;
- require firms to assess the level of cover appropriate to their firm beyond the minimum;
- introduce an aggregate limit on claims;
- require compulsory cover for claims by individuals, small and medium-sized enterprises, trusts and charities; and
- reduce run-off cover to a minimum of three years.
We remain concerned that the level of insurance premiums makes it more difficult for you to compete and increases the cost of services to consumers.
This is particularly the case for small firms – the Law Society’s 2013-14 survey stated that ‘the cost of premiums remains by far the most important factor in decisions about which insurer to use for nearly all firms… a higher proportion of sole practitioners gave cost as the most important factor in their decision’. The survey also confirmed that, although the differential had fallen, sole practitioners paid a higher percentage of their income in premiums than other firms.
The timing of the consultation was motivated by our desire to assist practitioners and insurers in negotiating less rigid terms and lower premiums for the 2014 renewal process, which for most firms will be in October.
Although a common theme of opponents of the proposals has been that they will not reduce premiums, our advice was that premiums could reduce by between 5%-15%.
Taking on feedback
The consultation exercise we carried out attracted a wealth of feedback which provided us with much food for thought. As a result, the SRA board, at its meeting on 2 July, decided to introduce the requirement for firms to assess and purchase an appropriate level of indemnity insurance cover and reduce the minimum level of compulsory cover to £500,000.
We believe these changes will enhance consumer protection, and reduce unnecessary regulatory burdens and costs on small firms undertaking low-value transactions. The former change will ensure firms have a positive duty to purchase cover at a level appropriate to the nature of their business, clients and transaction value, rather than simply relying on the minimum level specified, even where that level might have been too low.
At the same time, the many small firms undertaking low-value transactions for consumers will have the freedom to purchase cover at a more reasonable level.
The other proposals from the consultation have been deferred until 2015 to allow further consideration. We are still confident there is merit in all the proposals and there was support for them in the consultation. But they will benefit from further consideration alongside other possible reforms suggested by stakeholders during the consultation exercise.
There may be a wider review of all client protection matters, including compensation arrangements and the Accounts Rules. A call for evidence from those who raised points for us to consider in the consultation exercise will be launched this month and a further consultation paper will be produced by the end of the year.
Any changes will be announced in April to ensure they are considered in the renewal period starting in October 2015.
We are aware that we are seeking to make changes to indemnity insurance arrangements when we have also said that we want to create a stable market. That remains our long-term aim. But we also need to create a resilient market too, and for that we need to address the issues we have identified above and the suggestions made to us through the consultation exercise.
We are open to other ideas on further improving indemnity insurance arrangements, and anyone who wishes to make suggestions can do so by emailing email@example.com.
Crispin Passmore is SRA executive director for policy