In recent years there has been a decline in the number of insurers without financial security ratings operating in the solicitors' PII market.
Many unrated insurers emerged in the wake of the 2009 economic crash providing affordable policies to smaller firms who were unable to secure cover from their more established competitors. The first half of the decade witnessed the collapse of a number of these newcomers, including Quinn, Lemma, ERIC and Balva, leaving thousands of firms across England and Wales uninsured and struggling to find replacement cover. The failure of these insurers highlighted the importance of obtaining cover from a financially secure insurer and the potential risks of making cover selection based solely on price.
The dangers have also been highlighted by the FCA's recent censure in February of the managing agents involved in issuing binding authorities for a number of PII schemes. In a decision which followed an investigation into the validity of solicitors' PII cover sold to some 1,300 firms, the watchdog fined five individuals and two firms a total of GBP 15.5 million, and banned four of the individuals for significant competence and integrity failings.
The FCA found that the insurance schemes in question were all linked to Shay Reches, a director of insurance intermediary Coverall Worldwide Limited with responsibility for a managing general agent, Aderia UK Limited. Reches used binding authorities issued by Aderia to various cover-holders, including to a specialist PII broker, Bar, which targeted solicitors. Security was needed from a number of insurers and reinsurers based in the UK, the rest of Europe and offshore. The principal risk carrier, Sinclair Insurance Company, was registered in the Comoros (an archipelago in the Indian Ocean) and owned and controlled by Reches.
The FCA concluded that failings in the management oversight throughout these distribution chains, and the failure of the reinsurance arrangements, contributed to three unrated insurers – Millburn, ERIC and Balva – all entering administration and unable to honour the insurance they had offered to hundreds of law firms.
More broadly, a drop in premiums caused by increasing competition from rated insurers, coupled with growing scrutiny from the regulators, means that the PII market may no longer be as attractive for unrated insurers as it once was.
The decline in unrated insurers in the solicitors' PII market has continued into 2016 with the announcement, in February (coincidentally, in the same week as the FCA decision referred to above), that Elite Insurance (one of only three unrated insurers remaining in the market, and the only one based in the UK), will not be writing any new policies or offering renewal terms on its existing solicitors' professional indemnity book. The company cited a number of reasons for its decision, including an increased propensity to fraud on solicitors' client accounts, as well as falling premiums. Elite's exit leaves only two unrated insurers on the SRA's Qualifying Insurers panel – Alpha Insurance, based in Denmark and Enterprise Insurance, based in Gibraltar.
A market research report prepared for the Law Society and published in April this year shows that, of the 560 1-25 partner firms surveyed, 6% took out policies with Elite and Alpha (Enterprise did not appear). Just under a third of the firms surveyed listed financial security of an insurer amongst the top three factors when buying insurance with price being predominant.
It remains to be seen whether any further unrated insurers will emerge to fill the gap left by Elite, or whether Elite's withdrawal will lead to a reduction in capacity for 1-25 partner firms.
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