LSB questions ‘one size fits all’ approach to indemnity insurance

PII: LSB to provide advice on different models

The diversity of the legal services sector means the one-size-fits-all approach to professional indemnity insurance (PII) adopted by its regulators “may not be the most appropriate”, the Legal Services Board (LSB) has said.

It is set to provide advice to regulators about different models they could use, such as practice area-specific mutual funds and encouraging the use of third-party managed accounts.

The oversight regulator committed last year to investigating financial protection for consumers in the wake of the hardening PII market in 2021, which led to a “sharp rise” in premiums and higher excess fees.

As part of this, the LSB and Solicitors Regulation Authority (SRA) jointly commissioned Frontier Economics to analyse the factors that drove variation in PII premiums.

The full report is due to be published soon, but in a paper for last month’s board meeting, the LSB said it had concluded that “the most important drivers of premiums were firm size, and firms specialising in property work”.

Property law firms and small firms “tended to pay higher premiums as a percentage of their annual turnover, therefore their consumers might be most impacted by rising PII premiums”.

Researchers said that “to a lesser extent” law firms conducting private client, litigation and corporate work also paid higher premiums, a pattern which was “largely reflected” in their analysis of the estimated contribution of PII premiums to legal fees paid by consumers across different areas of law.

Other drivers of higher premiums included “having more fee-earners (and qualified fee-earners), holding high and variable amounts of client money, regulatory action, and more cyber insurance”.

Factors behind lower premiums included more work in employment law or legal aid work.

The LSB said it had concluded from these findings that “because the legal services sector is highly diversified, the one-size-fits-all approach adopted by regulators in their PII arrangements may not be the most appropriate”.

Conversely “there may be scope for a more graduated approach to PII that is more closely aligned to risk”.

There was also “a lack of transparency about what drives premiums, limiting the ability of firms to identify and respond to risks that would reduce their cost exposure”.

Although there was “limited evidence of consumer harm to date”, there was a risk of reduced access to services if higher prices for PII were passed onto consumers.

The LSB said that, after the Frontier Economics report was published, it would put together a paper “setting out insight and options for the legal services regulators to take into account, when they consider the PII  arrangements for their regulated communities”.

The paper would not take the form of rules, guidance or policy, but would “sit within the regulatory performance sourcebook”, meaning regulators should consider it when reviewing their PII arrangements.

The LSB said options in the paper for regulators could include alternative insurance models, such as “mutual funds for certain types of firms operating in specific practice areas”.

Other options were improving “existing tools such as third-party managed accounts” for small firms or ongoing competence, which could reduce the risk of claims arising.

Supervisory activities that could provide “additional assurance to insurers” were another option, along with “collaboration with financial institutions to improve use and quality of data gathered by PII insurers, for example through greater transparency or standardisation of renewal forms”.

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