Unrated and unreliable?

The demise of unrated Latvian insurer Balva has prompted the Law Society to urge law firms to "break the unrated insurer cycle".

Balva was forced out of business earlier this week when the Latvian financial services authority found it failed to meet provision level and capital adequacy requirements.

According to Chancery Lane, Balva was only the latest of a number of unrated insurers entering the market, signing up a significant tranche of the SME market before being wound up within a short period, and policyholders transferring to another - sometimes new - unrated insurer.

"While transferring policies to another unrated insurer may be a short-term option until the next PII renewal date we continue to urge firms to break the unrated cycle and investigate carefully their alternatives to opt for rated cover this renewal," Des Hudson said.

Last year 16 per cent of firms, most of them small and medium-size, signed up with an unrated insurer - an 80 per cent rise on the previous year.

And sole practitioners are likely to be worse off: nearly one in four (22 per cent) have PII cover with an unrated insurer.

"For a sole practitioner, PI insurance can be the biggest annual expense they face, so having to pay for replacement insurance would be a huge financial blow," former Sole Practitioner Group chair Karen Purdy told Solicitors Journal.

"Firms may choose PI insurance based on price, rather than claims-handling or their security-rating, out of necessity," she said, before adding: "We all hope that our firm won't have a claim and trust that the insurer will be there when we need them - there's no guarantee of that, whether the insurer has a great security-rating or not."

Purdy's comment echoed points made earlier by SPG's honorary secretary Clive Sutton. Indemnity insurance was a "one year deal" and there was "nothing to say" that Balva was not reliable or would not pay up, Sutton said on the news in April that Balva had been banned from writing any new business in the UK.

"Insurance is very price sensitive for sole practitioners, with our margins, and some people don't want to pay an extra £10,000 just to get into a Rolls Royce situation.

"We're not being cavalier about it. As long as we are assured by the Financial Conduct Authority (FCA) and the SRA that the insurance is still good, people are entitled to go for lower quotes."

These views found support from insurers too.

In a statement to Solicitors Journal, Prime Profession, the SPG's recommended broker, said firms should not rush into answering Chancery Lane's call to move away from unrated insurers.

"In our opinion, all affected firms should carefully review this replacement option before committing to it. They should also investigate the alternative options available to them," the SPG's update guidance said.

"There are a number of credible 'A' rated insurers willing to consider offering quotations at this year's renewal. Firms should take some time to understand which brokers and insurers are in a position to offer assistance."