The proposed PII reforms – who benefits?

The Solicitors Regulation Authority (SRA) has published a series of proposed changes to the system of professional indemnity insurance (PII), and to the Compensation Fund. The SRA wants to reduce the minimum levels of insurance cover that regulated firms must hold. Currently, firms must hold either £2m or £3m of cover, and the SRA intends to reduce those minimum levels to £1m for firms which do conveyancing, and just £500,000 for all other firms. They have also proposed a number of exclusions, for example for business clients who have a turnover in excess of £2m a year.

As the representative body for the solicitors’ profession, the Law Society will be submitting our analysis of the SRA’s proposals. But one of the questions we are left with is: who will benefit from these reforms?

Will small firms benefit?

Let’s look at two types of small firm.

Small Firm A decides that as a result of the SRA’s proposed changes, it will reduce its level of cover down from £2m to £500,000. Will Firm A benefit?

Well, it could see a slight reduction in its insurance premium. The SRA estimates that firms which move down to the new minimums will see a nine to 17 per cent reduction in what they pay for their insurance. However, the insurance industry has expressed scepticism about whether these savings will eventuate. We know, from the SRA’s published data, that 98 per cent of claims come in below £580,000, so it’s hard to imagine that there will be significant savings to premiums, and nine to 17 per cent seems on the high side. But Firm A might see some saving to its annual premium.

But savings to premiums don’t come for free, so what would Firm A lose by way of protection? Well, it loses 75 per cent of the cover that it previously had. Now, if a £1m claim comes its way, it will not have insurance protection.  Also, if it provides legal services to business clients with turnover of more than £2m a year, its insurance would not cover them. In that case, Small Firm A would be faced with the unenviable choice of turning down work from these clients, or buying a top-up insurance policy that would be likely to wipe out any savings it had received. It’s hard to see that, with a more than 75 per cent loss of cover, in exchange for minimal reductions in premiums, Firm A would benefit from the proposed changes.

Small Firm B decides that, despite the fact that the SRA has made changes, it wants to maintain its current levels of insurance cover. This means that Firm B wants £2m of cover, and it wants conveyancing activities to be included, as well as business clients, regardless of turnover. Will Firm B benefit from these changes?

The answer is no. It’s likely that Firm B will need to devote more time to purchasing insurance cover, from more providers, and will most likely have to pay more for that cover.

Rather than simply buying insurance at the level of the current minimum terms and conditions, Firm B will have to engage with a much more complex set of purchasing decisions. As well as buying cover at the new minimum terms and conditions, it will need to add on conveyancing cover, purchase top-up cover so it is covered up to £2m, and add on cover for business clients with turnovers above £2m. This is hardly reducing red tape for Firm B.

That isn’t the end of the bad news for Firm B. When selling top-up cover, insurers are not obliged to make that cover as robust as the minimum terms, so it is unlikely that that cover will be as comprehensive as Firm B would have received prior to the SRA’s changes.

In addition, Firm B may well end up paying higher premiums after the SRA’s changes than it did before. We know from the Law Society’s PII survey that between 2014-15 and 2016-17, the average cost of an insurance policy at the minimum terms and conditions fell by 8.9 per cent, and the average cost of top-up cover rose by 12.4 per cent. The impact of these changes will be to require Firm B to buy more of the increasingly expensive top-up cover, and less of the cheapening minimum terms cover.

Will large firms benefit?

Large Firm C has always bought cover far in excess of the minimum terms and conditions set by the regulator. So Firm C will certainly not see any cost reductions as a result of these changes, and therefore won’t see any benefits.

It’s fair to assume that Firm C will be better placed to engage with the complexity of the insurance market than a small firm would be.

However, Firm C could lose out from the changes. An increasing proportion of its insurance will be top-up cover, which is likely to be more costly and less comprehensive than minimum terms cover.

Will clients benefit?

Clients are not experts in legal services regulation, and nor should we expect them to be. When a client walks into a solicitor’s office, they want help with their legal problem, and they will not be worrying what level of insurance cover their solicitor might have. Unfortunately, as a result of these changes, clients can no longer simply rely on the fact that their solicitor has at least £2m of cover.

What we do know, as a result of these changes, is that the protections clients receive will be less comprehensive and robust than they were before. And clients are unlikely to see any appreciable savings to their bills.

The following table (based on Legal Services Board research into the pricing of legal services and the Law Society’s annual PII survey) shows the minimal savings that are likely to come about if the reforms work precisely as the SRA hopes

So who will benefit?

Insurers stand to benefit, to the extent that their liability will be substantially decreased, while any reductions in premiums that they choose to pass on to solicitors will be so insubstantial that it will hardly affect their bottom line. But, nevertheless, there has been little public support for the changes.

The SRA will benefit, if it succeeds in its attempt to shift the burden of regulating small firms from themselves to the insurance industry.