How healthy is this market now, and does it have a profitable future?

Participating insurers who have an established track record of underwriting the legal profession and a stable book of solicitors are in a better position to return a reasonable profit margin. Writing this class of business requires a minimum level of investment over many years in order to smooth the inevitable spikes in the loss ratios.

The profession as a whole has fared well since the commercial market came into being in 2000. The total premium declared for each year in the commercial market has been below the final contribution collected by the SIF. The commercial market has clearly been a success despite the problems caused to the profession and insurers by the ARP. In the report prepared by Charles Rivers Associates (CRA) for the SRA consultation in 2011, they established that the average cost of insurance (including the ARP) in the open market has been around 1.4% of gross fees. This compared with 2.2% under the master policy and 3% under the SIF. CRA estimated that, had the master policy of the SIF continued, the cost of premiums would have been £412million or £557million respectively, for the 2008/09 period. The open market premium for the same period was £226million

Large law firms and firms undertaking low risk work or with a sustained claims free record have benefitted from significantly lower premiums since the profession's PII was moved onto the open market.  It has tended to be smaller, higher risk practices that have ended up insuring with unrated carriers - leading to a toxic cocktail in which the insurers least able to sustain heavy losses have insured the highest risks, and at unsustainable rates.

Anything else of relevance to this sector?

The financial fallout from firms practicing without PII may well end up being borne by the profession. With the Assigned Risks Pool no longer providing cover for 'non applied' firms, the cost has been shifted to the Compensation Fund. In the past the ARP has paid out million in claims for 'non-applied' firms and the estimated number of such firms now, can only mean this cost is about to increase.

Implications of practicing without PII cover in place

Any firm which continued to practice without a valid PII policy after 29th December 2013 will not be covered by its last insurer for work undertaken after the 90 day extended period has expired. Claims emanating from work post 29th December will be directed to the Compensation Fund.

Insurers will continue to provide cover to the firm for all work up to 29th December however they will be able to seek recovery of claims paid out for new work carried out during the cessation period. Firms who entered the cessation period should only have undertaken work to dis-charge any of its obligations for existing instructions. Any firms who ignored this restriction and continued in private legal practice regardless, expose themselves to insurers exercising rights of recovery for any claims paid.

If you would like to discuss any of these issues further then please do not hesitate to contact Steve Holland