Solicitors PI: the end of the Assigned Risks Pool?
In November 2009 the Solicitors Regulation Authority opened a consultation on the future of the Assigned Risks Pool which, the chair of the SRA has said, is “costing a huge amount of money but demonstrating little benefit”.
The SRA has put forward a number of proposals:
* The SRA would cease to issue ARP policies from 1 October 2010 (i.e. the next renewal date)
* New firms would not be eligible for the ARP after 30 September 2010
* The maximum period a firm could remain within the ARP might be reduced to, say, 12 months
The SRA’s proposals are radical and likely to have a significant impact on the renewal season for 1 October 2010.
The ARP – the current system
The ARP is operated by a Manager (currently Capita) appointed by the SRA. Firms (other than those that have been in the ARP for two or more of the previous four years) are eligible for cover and can remain within the system for 24 months.
The majority of firms in the ARP are sole practitioners or two partner firms and premiums are high (up to 27.5% of gross fees) although, as the figures released by the ARP Manager for the purposes of the current consultation demonstrate, there have been significant difficulties in collecting such premiums. In the last two years for which statistics are available, premium collection rates have been 20% and 25% of the total premiums due from firms within the ARP.
In order that the public is fully protected, there is also a system for insuring solicitors’ firms which carry on in business without obtaining insurance at all (the so called “non-applied” firms). This works on a similar basis (referred to as the “side-arrangement” in the consultation document) to that for uninsured drivers operated by the Motor Insurers Bureau. Premiums are, unsurprisingly, even more punitive (up to 120% of the ARP premium) but little, if any, of this premium is ever collected.
Each Qualifying Insurer must fund the ARP by reference to the amount of primary premium it has written for the first compulsory £2 million or (for LLPs) £3 million limit of cover for the solicitors’ profession as a whole. Insurers are unable to cancel cover due to the non-payment of premiums.
Life after the ARP
There are a number of ways in which solicitors’ firms can leave the ARP, including closure (usually when they are unable to afford to carry on), intervention by the SRA or, in some (comparatively rare) cases, acquisition by other firms who are able to obtain Qualifying Insurance.
The other option (which was undoubtedly a significant driver in the establishment of the ARP) is that a firm may recover its profile (for example, in terms of categories of work conducted and claims history) to the extent that it is able once more to obtain Qualifying Insurance in the open market. In this way, the ARP is able to provide a firm which has experienced a downturn and cannot obtain insurance on the open market, a period of “breathing space” in which to regroup and recover.
That said, the statistics from the ARP Manager show that the reality for the vast majority of firms in the ARP is very different; the consultation document points out that, in the 4 years from 2004/5 to 2008/9, only nine firms insured by the ARP at the end of each period were subsequently able to obtain cover in the open market. To put this in context, the number of firms in the ARP has risen from 26 in 2007/8 to 166 in 2008/9 and probably around 300 in 2009/10.
To complete the picture, the claims figures for 2008/9 released for the consultation show that £1.67 million was received from the ARP scheme by Qualifying Insurers by way of premiums (with £4.8 million as yet unpaid), whereas paid and reserved claims totalled £13.4 million, a loss ratio of 800% for that year. The average loss ratio is 600% for the last 9 years.
In total, Qualifying Insurers have paid £28 million to fund the ARP to date (over and above premiums received) and representatives of those Insurers were included in the process which has resulted in the SRA Financial Protection Committee making the radical proposals for change which are now on the table.
Options for the future
**Proposal 1:** The SRA will cease to issue ARP policies from 1 October 2010 (i.e. the next renewal date)
This is the SRA’s preferred and “firm” recommendation. Firms would no longer be able to enter the ARP, so that those unable to obtain insurance would be required to close or face intervention by the SRA in short order, which would produce the same result. The Qualifying Insurer currently insuring such a firm would provide run-off cover for the next 6 years.
Accordingly, on the basis of the evidence from this year’s renewal, potentially large numbers of small solicitors’ firms would be closing their doors in October 2010 or shortly thereafter.
Under this proposal, those firms which are currently in the ARP could continue in the ARP for as long as they are eligible to be there as part of the run-off process for the ARP itself.
**Proposal 2:** New firms only will not be eligible for the ARP after 30 September 2010
Firms currently in the ARP would, therefore, be able to remain there until the end of September 2011.
**Proposal 3:** The maximum period a firm can remain within the ARP may be reduced to, say, 12 months
It is clear that the SRA is going to argue strongly in favour of the first proposal on the basis that the long term interests of the public, the profession and Qualifying Insurers are all best served by doing away with the ARP. That said, a recent editorial in The Law Society Gazette has sounded a cautionary note on the basis that the changes would mean that, in future, it would be the insurance market (which, as the editorial recognises, loathes the ARP concept) that would have the power to decide whether solicitors’ firms could remain open for business, and not the profession itself.
For those who wish to express their views, the consultation remains open until 12 February 2010. For more information on that consultation, click here
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com
The ARP is part of the market based compulsory professional indemnity scheme for solicitors which was instituted in 2000. The cover provided by the ARP satisfies the Minimum Terms and Conditions that all policies issued by Qualifying Insurers must meet in order that there is no diminution in the protection to the public on a firm’s entry to the ARP; indeed, the public will be oblivious to this fact.