A RATING GAME FOR LEGAL EXPENSES

The sustainability of the traditional legal expenses business model with its in house legal operations is back on the agenda as some of the larger players in the sector implement rate increases. Over the last 12 months increases, in some cases representing up to 50% of the total gross premium a broker would typically charge, have been announced. These are, no doubt, making a significant dent in some brokers’ commission incomes.

The rate increases have been justified by highlighting increasing claims costs. But, are these cost increases alone a significant enough driver for rating changes or is it time to look at the efficiency and robustness of the traditional model?

Generally speaking there is an increase in the number of employment-related claims and some of the cost associated with them. With the typical employment section of cover now representing over half the premium in a standard legal expenses policy, the correlation between increased costs and rising premiums does seem obvious. But it is important not to just look at this factor in isolation.

In general terms claims relating to consumer and property disputes are reducing – driven in part by the impact of reduced consumer spending – so can some of the increased cost in employment claims be off-set by reduced costs in other areas of the legal expenses insurance (LEI) portfolio?

Controlling cost is the mantra for every business in the current economic conditions. For the LEI sector the role, use and costs associated with non-panel law firms is a significant part of the cost debate. This is not surprising when you consider that the typical non-panel firm’s costs are four times that of a panel firm. The implications of complete freedom to choose a law firm have a direct link to increased costs. With low cost, add-on BTE insurance recognised as a clear alternative method of funding litigation, the barrier created by an increase in premium would be contra to the Government’s stated support for BTE as a way of improving access to justice.

Of course, we cannot predict the future and certainly there are a number of issues on the horizon that could create an environment where premium rate increases become inevitable.

The proposal announced by the MoJ to charge individuals fees to bring employment tribunal cases also has the potential to increase costs for LEI insurers. If a fee is introduced insurers will undoubtedly end up picking up the cost as part of the claim.

The thorny issue of referral fees continues to rumble on, particularly for those in the market who use them to bolster their bottom line. While a straight forward ban is unlikely to address the real issue surrounding these arrangements, a reduction in the level of recoverable costs available will create challenges for those with a heavy dependency on referral fees.

The plan to introduce qualified one-way costs-shifting in personal injury litigation has created some strong opposition around the use of means-testing. There is uncertainty around a number of aspects including the types of alternative funding options for claimants and what that would mean to legal expenses insurers’ claims costs.

The changing landscape is a challenge for the sector but that shouldn’t be seen as a default reason for rate increases. Predicating the future and knowing how any one of these issues might impact on those businesses in the sector is a difficult exercise. However, by ensuring their business models are fit for purpose (an efficient and flexible model) has to be a priority if insurers are to find ways to reduce the impact of cost increases on rates. Could this be the real challenge for the traditional legal expenses insurers?