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Although the most optimistic market predictions of legal expenses insurance (LEI) becoming an automatic feature of all personal insurance products have yet to be realized, growth has still been significant and we are certainly moving in that direction.
From a specialist, stand-alone niche product in the early 1980’s the market is now worth approximately Â£100m. But, the reductions in available capacity, product pricing and costs controls, and the perennial question of customer awareness-versus-usage raise questions about future market growth and the sustainability of providers.
Awareness of the availability of the cover has increased, in large part due to the publicity surrounding the rise and fall of high profile After-The-Event players. However, awareness of what personal and commercial LEI policies actually cover, compared with, say, Uninsured Loss Recovery, remains low, even within the industry.
The majority of the LEI providers have evolved their business models focusing on adding value to an underlying insurance product, offering insurers and intermediaries cost effective differentiators – the low cost, and, unfortunately low perceived value proposition is the basis on which today’s market has been built.
Any plans to build a main stream product offering, standing alongside other covers rather than as a bit part of them, playing a significant role not only in generating profits but also delivering wider access to justice for the population, have not really come to fruition. The UK has some way to go to reach the size of other European markets; Germany, in particular, where premium income levels are close to Â£2billion.
Premiums for personal LEI remain extremely low. In most cases they are lower now than they were when these covers were first introduced over twenty years ago. At the same time benefits have increased with the cover now available offering higher indemnity limits insuring a wider range of matters. This is against a background of increasing legal costs and a claims incidence rate, which whilst still very low in percentage terms, is showing signs of growing as awareness of the cover begins to rise. At first glance this situation appears both artificial and unsustainable.
The most obvious effect of a premium level that continues to remain so low is a perception that the cover itself has little value. This is not only among the general public but also within the insurance industry itself. The growing disparity between this and the reality of maintaining appropriate levels of premium raises the question of how sustainable the market can remain. Low premiums and increasing claims volume, with legal costs amongst the highest in Europe mean the only answer, with no sign of rates hardening, is rigorous cost management, and that can only truly be achieved in an environment where there is commonality of interest between insurers and solicitors.
Traditionally, there has been no mutuality of interest between the legal expenses insurer and the solicitor responsible for handling the claim. The insurer’s concern has, quite naturally, been ensuring that it does not become the law firm’s cash cow. The development of more innovative claims handling models, not just based purely on cross subsidy of costs but involving the solicitor in managing the risk means that this dynamic is beginning to change, with potential for true partnership arrangements to develop between providers and legal practices.
The recent emergence of solicitors as providers of before the event LEI introduces a new dimension to the existing competition within the market, and, if this trend develops, the effects could be extremely interesting. In the minds of the public the link between the provision of legal services and the insurance of the costs associated with that provision, is, no doubt, far easier to make when the solicitor is selling it than its inclusion as an underlying cover within a household insurance policy.
The major players in the LEI market rely on a sophisticated in-house claims management capability. In many ways this function duplicates work that would normally be undertaken by the law firm that actually handles the case. By introducing a model which effectively involves that firm in the risk management process, the insurers and solicitors interests begin to converge; the underwriting position is protected and the need for an expensive in-house policing function starts to disappear.
All personal LEI products are built around a telephone legal helpline that acts as a both a method of accessing legal advice and as the point of contact for claims notification. The established providers have their own in-house helpline facilities. These can be extremely effective, but by their very nature are complex and expensive to manage. To be competitive providers have to closely match resources to utilisation. To provide a quality service the provider needs articulate, efficient and knowledgeable lawyers, prepared to handle large volumes of calls day in day out whilst working in a call centre environment. Such people are very difficult to recruit, even more so when trying to concentrate them in one location. Even when this is achieved retention is a big problem. There are lots of opportunities out there in private practice for just the sort of people the in-house operators are trying to attract to their organisations.
Increasingly alternatives are being examined. At least one established legal helpline provider has abandoned the in-house solution and developed an approach based on lawyers working remotely but linked by a sophisticated telephony system creating a “virtual call centre”. This model gives a much greater degree of flexibility. No longer is the provider tied to one geographic area. The recruitment pool is extended nationwide. By employing home workers, who tend to be much more flexible in terms of hours worked, the provider is able to respond to the peaks and troughs of utilisation inherent in any helpline much more effectively. Furthermore, they do not have the cost burden of a call centre to add to their problems.
Legal helplines were first developed in the early ’80s at a time when lawyers in private practice simply did not have the resources to provide the sort of capability required to offer a legal helpline service at anything like a reasonable cost. That situation has now changed dramatically with an increasing number of large firms out there that not only have the capability but are now competing head to head with the established providers and winning significant pieces of business. The large nationwide law firms have the advantage of already employing significant numbers of lawyers in modern call centre style offices. This gives them the staffing flexibility they need in order manage fluctuations in call usage. The recruitment and retention problem is addressed by the fact that the firm can offer opportunities in career development that are simply not available to the traditional helpline provider.
Against this backdrop there is an emerging shift in the attitudes of intermediaries, insurers and affinity groups towards what constitutes a real product differentiator. Added-value services were a buzz phrase but for increasing numbers of operators there is a need to deliver value. This approach is creating new opportunities for LEI. So is there a divergence between the ‘customers’ needs’ and the focus of the traditional legal expenses market? The signs are certainly there. While some providers have indicated market growth in the high street intermediary and insurer sector, the increasing demand for bespoke cover has started a shift by a number of insurers, affinity groups and wholesale intermediaries away for the traditional providers to new providers such as Arc.
The question that the traditional LEI market has to answer is whether they can respond to the changing needs and evolve their businesses quickly and cost effectively enough in the future to take advantage of these new opportunities.
A version of this article appeared in Insurance Age in November 2003.