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The considerable speculation about the future of the personal legal expenses market in light of the high profile fall of ‘brand’ names in the after the event insurance market and the issues of sustainable premium levels and the search for product differentiation gathers pace. These factors together the impact of wave upon wave of workplace legalisation placing an increasing amount of pressure on business and increasing opportunities for litigation in the commercial legal expense market has added to the market’s problems.
The first legal expenses policies to be introduced in the UK in the mid-1970s were stand-alone products that very quickly became uneconomic. Poor case management and adverse selection were the main reasons for the shift towards the products in circulation today.
In these early days legal expenses insurance was seen as a broker only specialist add on cover. Premiums were relatively high and take up low. All of this changed with the move by a number of insurers and intermediaries to offer the cover as an optional add on and latterly as a compulsory benefit. As the profile has increased, the legal expenses market has moved from a peripheral position into the insurance mainstream.
For the broker market, insurers continue to offer household and commercial covers without legal expenses insurance (LEI), giving intermediaries the opportunity to generate additional income from commissions earned on the provision of an optional add on, with the intermediary negotiating his own arrangements with LEI providers. In the lender and direct market, the tendency to “bundle” the product as either as an opt out or compulsory section of household policies is now the norm.
Over the last few years in the personal legal expenses sector in particular, premiums have fallen in real terms with cover offering wider benefits and higher indemnity limits at cheaper premiums- commonly as little as 10% of that paid in continental Europe. And the premiums remain extremely low with little sign of any hardening. A number of industry figures are now questioning whether premiums are depressed to a level that will prove artificial and unsustainable in the longer term.
Claims incidence rates for personal legal expenses, historically always very low, are now increasing and individual claims costs can be high. The challenge to be met is in controlling costs and premiums, particularly in an increasingly litigious country like the UK.
The LEI industry relies heavily upon the use of panel solicitor arrangements to control claims costs. The policyholder gets a good standard of assistance from lawyers who are experienced in this type of work, costs are to a degree controlled and premiums therefore kept to a manageable level. Solicitor panels have been increasingly streamlined in recent years and the firms that have retained their places on the major panels have had to become highly focussed upon the needs of the industry.
The most successful panel solicitor firms have developed a very broad service range to enable them to service the full range of cover offered. With the emergence of the after-the-event market they have also developed strong risk management capabilities, to enable them to work on a “no win, no fee” basis.
The traditional LEI providers maintain substantial in house legal teams to protect underwriters’ interests. The infrastructure of these businesses has been shaped by the nature of the relationship between solicitors and underwriters, which is based upon an underlying inherent conflict, with the underwriter looking to minimise costs and the solicitor motivated to maximise income. The result has been investment by the insurers in infrastructures designed to manage the risk profiles and claims processes.
As the solicitors’ market has developed to meet the increasingly demanding requirements of the traditional providers, many firms have begun to wonder whether they could not become LEI providers themselves, sourcing their own underwriting and effectively cutting out the “middle man”. With continued price pressure in the market, cutting out a layer of unnecessary cost appears an attractive proposition.
The emergence of solicitors as LEI providers in their own right in the motor market has moved from a potential threat to a reality. The question now is whether the trend will continue into the commercial and household arenas. These areas cover a much more diverse profile of cases and would require specialist underwriting and risk management assistance, however it is not inconceivable that some solicitors will look to move in this direction.
The traditional LEI providers would say that their role in managing and monitoring the solicitor panels, and controlling claims costs for cases that go outside the panels is indispensable. Solicitors are increasingly questioning the necessity for this type of interface, particularly as freedom of choice of solicitor is effectively being curtailed in any event in order to control costs. It appears that the market could now be set to develop along two tracks. Which track is ultimately more successful and whether the two can co-exist for any length of time remains to be seen.
This article first appeared in July 2003 in the Insurance Times Legal Report Issue 7.