The unrated dilemma

Quinn, Lemma, Balva, Berliner. Every year unrated insurers have been and gone, leaving an unpalatable aftertaste that something is not quite right in the indemnity market, prompting the Solicitors Regulation Authority to propose a ban on insurers with less that a B rating.

Yet, every year for one year, they have been a lifesaver for smaller firms that can’t afford rated insurers’ premiums.

The difference is estimated to be as much as 15 per cent, which can be a matter of survival or death for some practices.

Last year the number of firms turning to unrated insurers nearly doubled, growing from 9 per cent the previous year to 16 per cent.

The recession, however, has highlighted the precariousness of their situation.

Risks that the economy can absorb in ordinary circumstances have become a lot more indelible as a result of the economic downturn.

A solicitor getting things wrong, being sued, and the claim succeeding is more likely now – perhaps not on an exponential scale, but it will only take a sudden wave of claims to seriously unsettle the system.

So, have we reached the point where we should really be concerned?

To date, there have been no reports of policy holders with unrated insurers who have been unable to make a claim.

Unquestionably the uncertainty that comes with yearly announcements that another unrated insurer is going bust is not satisfactory. But unrated insurers have helped hundreds of smaller firms.

For many of these firms, the choice of insurer is based on price alone, with little or no consideration for the claims-handling process or track record.

This may appear shortsighted but this is what they do; it’s a calculated risk. They buy indemnity cover because they have to; it’s the price for being in business as a solicitor.

In practice, unrated insurers have helped keep the so-called lower end of the market active.

Firms that fall within that loose definition are not necessarily managed any worse than other firms, and neither are the solicitors behind them less competent or less dedicated to their clients; they are smaller firms, it’s a matter of scale.

That’s also been for the benefit of thousands of clients who cannot afford the fees of firms that use rated insurers and tend to be larger. If any evidence was needed, the collapse of several mid-size firms has showed that size or ratings are no guarantee of safety.

In the growing climate of unease currently surrounding professional indemnity, it is easy to recommend that only rated insurers should be allowed to offer their services to lawyers.

But until there is clear evidence of detriment, the SRA should proceed with caution. It was reassuring to hear SRA board member Martin Coleman make that point at the regulator’s board meeting earlier this week.

And let’s not forget that the unrated insurers that have collapsed in the past few years were all duly vetted by their national financial services authorities.

The SRA’s consultation has not yet started but both the regulator and other stakeholders will need to bear in mind the wider market implications that any move to ban unrated insurers could have.

 

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Jean-Yves Gilg is editor of Solicitors Journal

jean-yves.gilg@solicitorsjournal.co.uk

 

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