The Solicitors Regulation Authority (SRA) is set to perform a u-turn on allowing unrated insurers to offer solicitors cover after discovering that they do not always have the same protections as rated insurers.
The SRA board will tomorrow be asked to approve a consultation that recommends that all participating insurers have at least a ‘B’ rating from one of the recognised agencies – ‘B’ reflects that insurers are considered secure.
It follows the exit in the last five years of four unrated insurers from the market – Quinn, Lemma, Balva and Berliner. While 11 rated insurers also left in that time, the SRA said the departure of unrated insurers is “far more likely to be ‘unplanned’ and related to financial difficulties compared to exit by rated insurers”.
The two regulatory interventions and two insolvencies among participating insurers in that time have all related to the unrated insurers.
Until recently, the SRA held firm to the position that it deferred to insurance regulators here and in Europe to vet the financial stability of providers.
However, following the problems experienced by Latvian insurer Balva, it commissioned insurance broker and risk specialist Marsh to determine if clients of England and Wales law firms enjoyed the same protections regardless of the rating of the insurer.
Though the SRA had believed the protections to be the same, Marsh’s initial findings suggested that they were not.
A report going to the board meeting said that if an insurer fails, clients are left to pursue claims with overseas compensation arrangements or with the UK Financial Services Compensation Scheme (FSCS).
It said: “The FSCS provides a degree of protection to clients of some firms but we have had examples of situations where large claims have not been covered by any insurance or compensation arrangements as a consequence of the failure of an unrated insurer.
“The current arrangements leave the market vulnerable to further large-scale entry by unrated insurers followed by rapid and unplanned exit with no guarantee that clients will be protected in these circumstances.”
The SRA also indicated that the Prudential Regulation Authority was urging it to deal with the issue, rather than relying on the FSCS.
There are three active unrated insurers writing business in 2013/14, with 12.7% of the market between them – Alpha Insurance (1,380 policyholders), Elite Insurance Company (1,046) and Enterprise Insurance Company (134). The SRA said that Alpha and Elite are expected to seek and obtain the required rating, but Enterprise would not be seeking one. It costs around £40,000 to obtain a rating, with a similar level of fees for annual monitoring.
Agnieszka Scott, the SRA’s director of policy and strategy, said: “We have always resisted calls to insist that insurers have a rating for a number of very valid reasons. The most valid of these was always the fact that we understood the protections offered to clients were the same, regardless of who their solicitor was insured with.
“Recent events, however, have made us look again at this issue to ensure that clients are protected. And we have been told that there may be inconsistencies, so we are proposing on insisting on a rating for insurers on the participating list.”