ARP firms “fail to pay £5.8m of premiums”

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By Legal Futures

15 April 2010

Brown: not enough evidence to make changes yet to ARP

Law firms currently in the assigned risk pool (ARP) have paid just 22% of their insurance premiums, while insurers are rapidly increasing the reserve for claims these firms may cause, it has emerged.

With worries over the impact of provisional administration of Quinn Insurance – which offered insurance to many firms that were struggling to secure it in the last couple of years – the news will increase pressure on the Solicitors Regulation Authority (SRA) to restrict the scope of the ARP, a decision on which will be taken next month.

Steve Ray, a partner at Lloyd’s broker Windsor Partners, revealed that as at 28 March, the 262 firms currently in the ARP were liable for £7.5 million in premiums – both record figures – of which just £1.7 has been paid. There were originally 309 firms in the ARP.

He added that in March alone insurers increased the reserve for potential claims against these firms from £3.1 million to £5.1 million. If the experience of 2008-9 is anything to go by, this figure is likely to increase rapidly and significantly.

In 2008-9, there were 139 firms in the ARP, which paid less than £2 million of their £5.5 million of premiums. Mr Ray said there have been 726 claims notified against these firms so far, including block notifications, meaning that in total 1,401 claims have been notified. Insurers have currently paid out £3.5 million, and have a best-case reserve figure of £35 million and a worst-case figure of £51 million. Mr Ray said insurers’ 2008-9 books have deteriorated far more quickly than expected.

Speaking at the annual conference of the Institute of Chartered Accountants of England and Wales’ solicitors group, Mr Ray said insurers are becoming much more open about the losses they are facing from solicitors’ business because “they say solicitors’ practices need to understand why insurers gripe about the loss experience as a whole”.

Last month, the SRA board decided in principle to make a series of changes to the ARP. These would halve the amount of time firms could spend in the ARP to one year and also close it to start-ups. However, the final decision was delayed because an equality impact assessment had not been completed; the draft indicated a potential adverse impact on race equality of closing the ARP to new firms, and possibly of reducing the time in the ARP.

At last month’s meeting, board member Yvonne Brown, a former chairwoman of the Black Solicitors Network, led opposition to the changes, saying the assessment did not sufficiently explain why there was an adverse impact and that more work was needed to identify the reasons. She argued that the board did not have the evidence even to proceed on an ‘in principle’ basis.

Five of the 16 board meetings voted against excluding new firms, but only Ms Brown voted against halving the time in the ARP.

The impact assessment should be finalised for the next board meeting on 4 May, at which a definitive decision is likely to be taken.

Mr Ray speculated that there is still more that could be done. He highlighted recent events in Ireland, where under pressure from insurers the ARP has been suspended, and the minimum terms and conditions amended to exclude cover for fraud, and reduce run-off cover to two years (it is six in England and Wales).

Mr Ray said the Association of British Insurers is in talks with the Law Society about the minimum terms, dubbed the maximum terms and conditions by many insurers.

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