In March 2013 Latvian insurer Balva, which underwrites professional indemnity and liability insurance in the UK through passporting rights, was prevented from underwriting new business in the UK by the Financial & Capital Market Commission. The regulator has confirmed that Balva’s license has been suspended as a result of regulatory 'deficiencies'.
Despite the fact that the SRA has assured the 1300 firms that hold Balva PI policies that they have no reason to worry as the restriction does not affect Balva’s obligation to provide cover for up to 90 days after 30 September if firms cannot renew their insurance, the Law Society is strongly recommending that firms who have been affected should research the available market and to obtain quotations from all insurers willing to offer cover for the 2013 renewal period.
Insurer solvency and ratings
While the Solicitors Regulation Authority (SRA) website carries a list of insurers that offer PI cover, solicitors are reminded that the SRA does not undertake any solvency checks on insurers and does not require a minimum level of financial security for participation in the solicitors' PII market.
The SRA has introduced a transparency requirement for all insurers, so they must disclose whether or not they have a financial security rating and the provider of this rating. The Law Society has recently lobbied the SRA to change the name from 'qualifying insurers' to 'participating insurers' to avoid perpetuating the misconception that insurers are vetted by the SRA. The SRA will adopt this change from 1 October 2013, subject to rule approval by the Legal Services Board.
Members should be aware that the SRA and the Law Society do not vet, approve or regulate insurers. The SRA enters into the participating insurers’ agreement with insurers each year where they agree to provide solicitors with PII policies. Regulation of participating insurers is undertaken by the Financial Conduct Authority, or, where an insurer from another jurisdiction is passported into the UK system, the financial regulator of that jurisdiction.
At present 12.5 per cent of the PII market premium share is with unrated carriers. While commercial pressures on firms may tempt them to choose the ‘cheapest’ PII quote, the true cost of this cover can be frightening. Opting for a low premiums is a false economy if the insurer becomes insolvent.
The failure of Quinn and Lemma is a warning to all firms about the risks of opting for an unrated insurer. There is a very high price to pay in these scenarios, in a personal, as well as business capacity. An official rating from an independent ratings agency is the most objective measure of a firm’s financial security.
Law Society advice
The Law Society advises smaller firms to make much better use of their available market and they need to obtain quotations from all insurers willing to offer cover. They should then assess these quotations based on a range of factors, including the insurer’s financial security rating. This is not a purchasing decision that should be made solely on price.
We have produced guidance to assist members to use the market to their advantage and have published new guidance emphasising the importance of an insurer’s financial security.