Sunday 30 June 2013

Is the Law Society looking to cash in on the Balva collapse?

Baron Rothschild, the 18th century British nobleman and member of the Rothschild banking family, is credited with saying, "The time to buy is when there's blood in the streets." He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.

On 17 June 2013, the Financial and Capital Market Commission (FCMC) decided to withdraw all operating licences issued to Balva and commence the winding-up process by appointing a liquidator. Hundreds of law firms who insured with failed Latvian insurer Balva face being caught in an ‘unrated cycle’ after offers from other unrated insurance providers. Balva are the latest of a number of unrated insurers  who have gone to the wall in the last few years.

In 2009, Quinn Insurance – which was soon to collapse into administration – lost €333m [£282.7m] in the UK alone, prompting it to pull back from solicitors’ PI. And only last year, another PI provider, Gibraltar-based Lemma Europe Insurance Company slipped into liquidation.

With the spotlight on unrated PI insurers I expect that the commercial gurus at the Law Society may consider that the opportunity is ripe to launch a professional indemnity scheme for small firms.

Such a scheme could be pitched at firms from one to four partners, an area considered riskier than large firms,.  The Law Society has warned that such firms were increasingly “turning to unrated insurers”. It would be a perfect opportunity for them  to  cross-sell other Law Society services such as CQS, Lexcel and compliance services in which they have a stake.

The Law Society has recently urged law firms to buy cover from a rated insurer this renewal period.   The Society mentions the “devastating personal consequences” an insolvent insurer can have on partners. And this week it told solicitors it was becoming increasingly concerned about the level of commission paid to insurance brokers.

The Law Society has a history of making such opportunistic commercial moves. The timing of the introduction of CQS was no coincidence. It occurred as soon as lenders started to cull their conveyancing panel and was applied for by most firms as a protective measure to maintain panel status.

Meanwhile the SRA has confirmed that it is considering introducing a financial rating criteria for insurers who write PI policies.  According to policy director Agnieszka Scott, “There have been numerous calls for us to allow rated insurers only, but we have resisted this restriction as it would be an unwarranted barrier to entry into the solicitors PII market. Until now, it would have been disproportionate for us to introduce a financial rating criteria.

“However, in the light of the insolvency of Lemma last year and recent developments with Balva, we decided that we need to look again at the impact of introducing a financial rating criteria,.”

The SRA will make its decision in time for October 2014 renewals.

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