In the legal sector - and the insurance market for that matter - the summer of 2010 was a tipping point; a realisation that things had gone too far and action was a necessity.

So what was the trigger for this sudden application of the brakes? The inevitable demise of the assigned risks pool (ARP) – a point of no return for hundreds of law firms, and bête noire of the insurance sector.

Ten years ago, the pool had been founded with the best of intentions. It would be a sanctuary of rehabilitation for firms that could not secure professional indemnity insurance. They were to be fitted with floating aids and taught how to swim again, until they were ready to be plunged back into the deep end.

The insurance industry was responsible for inflating the armbands and funding the operation, but now it had run out of patience. Too many firms were dropping into the pool and failing to recover, leaving insurers to pick up the bill for the final stages of their practice. The clamour for radical change was overwhelming.

‘In the summer of 2010 it was very clear that the market was under stress,’ confirms Richard Collins, head of standards at the Solicitors Regulation Authority. The SRA saw the number of firms entering the ARP rise above 300 for the first time in 2010/11, a 33% increase compared with the previous financial year.

Some 119 law firms had been closed in the space of two years - 19 of them through intervention by the regulator. Even accounting for a blitz on outstanding premiums and attempts to force payment of arrears, law firms in the ARP still owed £8.46m by the end of June 2011.

Collins’ organisation was charged with the daunting task of tearing up the system and starting again. The insurance industry wanted the ARP to be drained and cleared out, with unprofitable firms left to fail. Prospering law firms, unhappy at seeing their premiums rise because of the hopeless predicament of their peers, were inclined to agree.

But the SRA, Collins is keen to point out, could not simply empty the ARP overnight. An independent review of client financial protection arrangements was completed by Charles River Associates and proposals published in December. Crucially, the SRA did not heed calls to scrap the ARP immediately, much to the chagrin - and surprise - of some vested interests. ‘Unless there is this safety mechanism you risk endangering the clients’ best interests,’ Collins says.

In April, it was confirmed that the ARP would survive until October 2013, the SRA opting after that date to adopt the Law Society’s proposal of an extended renewal period of three months for those firms that cannot obtain insurance. In the meantime, from this October, the amount of time a firm can remain in the ARP will be halved to six months, while the cost of the scheme will be shared between the qualifying insurers and the legal profession.

Law Society chief executive Des Hudson welcomed the SRA decision as ‘demonstrative of an effective consultation process’ that would protect those firms most at risk from financial meltdown.

But there was dissent from the insurance lobby that the opportunity for radical change had been wasted and a scheme that was so patently not fulfilling its purpose allowed to continue.

Insurers currently pay around a fifth of their PII premiums into the ARP and it is apparent there is still ill feeling more than three months after the pool was handed a stay of execution.

Graeme Trudgill, head of corporate affairs at the British Insurance Brokers Association (BIBA), believes the changes were not as radical as they should have been, and warns there will be ominous consequences this summer for many in the legal sector. Trudgill says there is ‘no doubt’ that firms will be hit by price increases in the current renewal period, and small firms in particular will be hamstrung by a paucity of choice. ‘The SRA could have gone further and sooner but these are the cards we’ve been dealt.’

Elite Insurance was one firm looking to enter the market this year, but those plans were quickly shelved following the ARP’s preservation. This was a ‘missed opportunity’ to inject a dose of vibrancy and competition into the market, says the group’s chief executive officer Barbara Bock.

Neil Pointon, director of retail at Howden Insurance Brokers, agrees that the industry was ‘crying out’ for far-reaching and immediate reform, with market stability an inevitable casualty this year.

An extremely fragile economic recovery is only likely to exacerbate these issues. Although last year’s exit of some insurers from the market has not been repeated - so far - in 2011, many underwriters remain apathetic about entering a market while it is still characterised by uncertainty. As seems to have been the case for the last two renewal seasons, hesitation clouds the PII forecast.

Some new capacity is expected this year, but presently it is unclear whether this will partly replace, completely replace or more than replace any capacity that is lost through the current qualifying insurers. ‘So far most existing qualifying insurers are sounding a cautious note,’ states Pointon, ‘suggesting they are not particularly interested in growth and could retrench’.

Whether PI premiums rise or fall this year will depend on available market capacity - and the insurance market anticipates more bleak news for law firms looking for respite from their financial pressures. Most experts agree premiums will be more expensive to obtain, although not on the scale which has seen mass redundancies and firms heading for insolvency in recent years.

No one expects there to be bold new entrants entering the market with competitive - some would argue reckless - price offerings, as the spectre of Quinn, the Irish insurer forced to end solicitors’ cover last summer, looms large over potential newcomers.

Insiders have speculated for several months about two new entrants coming onto the scene - by the time you read this we could well know their identity. ‘It must be that they are preparing for 2013,’ Philip Steel, head of Greenwood’s professional indemnity group, suspects. ‘That is when the market may be attractive.’

Insurers may speculate about increased prices and the consequences of what they perceive to be the inadequate response of legal regulators, but the price of complete removal from the market may be even higher.

Analysts believe some firms will want a foothold in the market ahead of the ARP-free world of 2013 - and it would be a dangerously short-term approach for any interested party not to be positioned to benefit. You will hear the same argument promulgated by pro-Europeans in favour of increased integration: opting out may be initially attractive, but there is more power and influence to be gained inside than out.

Martin Ellis, of broker Prime Professions, is convinced the profession will see at least one extra option for solicitors to choose from – very useful when it comes to shopping around for the best deals. Some prospective new entrants undoubtedly blinked once the ARP was continued, with conversations abruptly ending with the SRA’s controversial decision.

But he says there is a strong argument to suggest this is a year to come into the market and create a book of business on your own terms. ‘A lot of the insurers who have been involved for the last 10 years say it is difficult to get into, so this may be the year to establish yourself.’

It is this contradictory aspect of the market, costly to enter on the one hand but dangerous to exit on the other, that will incite so much interest in 2011, despite no observable change in terms and conditions. As Steel remarks, ‘this is probably the most interesting renewal season for many years as it’s been building up for so many months’.

Fiscal aptitude

So what can firms do to avoid the annual panic and dread of insurance renewal season? The ARP may still exist, but this now has a defined shelflife and firms dare not slip in at a time when the period for escape has been shortened. Solicitors who have tended to treat cashflow and profit projections as necessary evils will have to demonstrate their fiscal aptitude, especially with alternative business structures looming just days after the renewal date has passed. Financial directors face major decisions across the country, with the insurance renewal form sitting in the ‘to-do’ tray. But how quickly should they be settling down to fill it in?

Some practices have expressed surprise that renewal forms arrived so early this year, having reported delays in starting the process in 2010 (many firms also complained, with some justification, that insurers were reluctant to offer them quotes until close to last year’s renewal date, with some in the profession claiming they were effectively being held to ransom). The temptation is to hold out for the best price, forcing insurers looking to fill their books into negotiating reductions in the premium, but the danger is always that most insurers will look to write a finite amount of business, leaving tardy firms rifling through the dregs as October 1 approaches.

Both insurers and solicitors concur it is best to secure renewals earlier this year and proceed through the summer with certainty over the accounts. Clive Sutton, a former chairman of the Sole Practitioners Group, agrees that for too long firms have been allowed to operate in circumstances where they are unable to provide competent legal services. A recent overview of the market by the group’s insurance sub-committee found that rates may have reached a plateau after years of rises. But now is the turn of the solicitor’s firm to be honest and efficient when it comes to renewal.

Sutton urges his colleagues not to flood a variety of different brokers with forms, as the same proposals will end up on the same underwriter’s desk and either confuse or lead them to reject it. ‘Send the proposal in July and don’t leave it to the last minute,’ he advises. ‘Prepare a clear proposal and don’t panic if it is not responded to straight away.’

When tricky questions are flung back by inquisitive insurers, firms need to have decisive and exhaustive responses. ‘Just saying "I’ll come back to you on that one" is not an acceptable answer,’ notes Sutton. There must be a clear explanation of previous claims which may provide a reason not to load the subsequent premium. All parties agree that the more transparent and less conflictual the information that is given, the more the underwriter will be able to give a reasoned decision.

BIBA’s advice is also to get forms in early and complete them comprehensively. The organisation has updated its buyer’s guide for solicitors and is getting them to work more closely with their broker to better present their risk.

Appetite for the market has diminished for insurers that have had their fingers burnt over claims from smaller firms, conveyancing firms in particular. For them to reconsider that stance, solicitors need to demonstrate they have never had a claim and have procedures in place to minimise risk. BIBA’s Trudgill maintains that brokers will fight hard to get the best deals for firms – but only if they have enough time to shop around. ‘In the past some law firms have left it very late and thought it was part of their strategy – this time you need to get in early.’

Steel adds: ‘The danger of holding your nerve until the end is that an insurer writing £10m of premium will have closed the books by August. Your risk is you end up booking a holiday you don’t want to go on.’Trust is likely to be in short supply between the two constituencies after years of antagonism, arising either through solicitors priced out of PII, or insurers feeling duped by law firms that have lied on their renewal form.

So how prone are law firms to being hit by negligence claims? Latest figures from the Ministry of Justice show that 144 professional negligence litigation cases were brought against solicitors in the Chancery Division of the High Court in 2010, compared with 210 in 2009. But as the economy continues to bump along the bottom, law firms appear under increasing threat of litigation, with this year expected to see significant increases overall.

Many insurers are privately seething at the prospect that firms can mislead them on renewal forms and continue to be insured - with their cover paid for by the insurance industry itself.

Such a perceived anomaly adds to insurers’ supposition that the SRA, formed in 2006, is still more concerned with upholding the narrow interests of the Law Society and its members than the wider public, but Collins assures the doubters that clients, rather than solicitors, are the priority. ‘Most of the criticism I receive is the desire from parts of the profession that we represent their interests better,’ he claims.

Certainly, there is plenty of evidence the SRA is acting with due rigour, with regulatory action for premium default under way against 126 practices. And there is little lingering sympathy for any firm desperate enough to give false information on renewal forms in the vain hope of securing cheaper premiums.

Collins notes that if the solicitors have lied on the proposal, the clients will still be paid, but the SRA will not stand back and ignore it. ‘If it is reported to us they have lied then those solicitors will be open to regulatory sanctions and disciplinary processes,’ he warns.

Great opportunity

With a degree of uncertainty and mistrust still prevalent in the solicitor PII market, it would be easy to be pessimistic about the prospects for this year and in the future. But while change is on the horizon, there are some reasons to be upbeat.

The renewal date of October 1, a mystery to most outside the profession and many inside, survived the recent consultation but is expected to disappear in the coming years - saving all parties from the annual rush and mistakes made in haste.

Greenwoods’ Steel urges all parties to remain optimistic that the open market will continue to present a ‘great opportunity for those insurers who manage the risks and the law firms to get the right cover’. The bill for most well-run firms will shrink over time as disreputable firms are moved out faster and claims exposure is reduced.

Insurers’ concerns regarding the extremely wide coverage that solicitors currently enjoy (due to the SRA’s minimum terms and conditions), and the resultant high premiums that predominantly small solicitor practices suffer from, mean that there is a tense relationship.

However, Howden’s Pointon believes that once both sides feel that they are on a more level playing field, ‘a greater harmony should evolve’ in the coming years.

Insurers will be factoring in risk this year like they have never done before, with outcomes-focused regulation and the Conveyancing Quality Scheme part of the mix.

The Law Society reiterates that accredited schemes, such as the CQS or Lexcel, its practice management standard, will ‘provide your clients and insurers with increased confidence’. To put themselves in the optimal position, firms will have to demonstrate to insurers that effective risk management systems are in place.

The SRA remains convinced it has taken the right action in the interests of solicitors’ clients - and that firms will not continue to suffer from the high prices and lack of availability that beset them today. But if they still cannot survive in those more favourable conditions, the authority warns there will be no bailouts in future - and no safety nets for those who cannot prove to insurers they are a risk worth taking.

‘In two years, we will have a more vibrant and competitive market,’ concludes Collins. ‘Those firms that can’t get insurance will frankly have to close but there will be a mechanism to make sure it is done in an orderly fashion to protect the client.’

Clients and insurers will no doubt welcome attempts to shield them from the rogue solicitor firms that have lied on renewal forms and refused to address outstanding premiums.

For their part, firms will welcome extra time to balance their budgets and edge themselves closer to sanctuary from the black hole of the ARP. But change is looming, and decisions made this summer will determine whether firms survive to see it.