/ By Jenny Carter-Vaughan / Latest News • Uncategorized/ • • • • • • • / 0 Comments

ABS and ATE – Regulation and PII Insurance

Much has been written in recent months about the changes in how solicitor practices conduct business. The so called Tesco laws which allow non lawyers to own a solicitors practice came into force on the 3rd January 2012 and Alternative Business Structures (ABS) became a reality.
Ironically, despite five years of free advertising, Tesco’s have so far declined to take part in the party.

In fact there has been little interest so far in forming ABS’s – the Solicitors Regulatory Authority reported “more than 10 applications” had been received by close of play on the first day. With an ABS licence predicted to take up to nine months to secure, it seems unlikely that ABS will have an immediate impact on the legal market. However the scene is set for the corporate money to move in and this will inevitably be a game changer.

The Jackson reforms are the other wind of change that’s blowing through the legal services market. The Government seems set on banning payment and receipt of referral fees by solicitors and insurers by amending the Legal Aid, Sentencing and Punishment of Offenders Bill. Legal firms who rely on referral sources to generate their case load need to start planning now or these reforms will seriously affect the flow of business. Referral agents and After the Event Insurers (ATE) will also considering their future.

Inevitably the interested parties will find a work around whereby work and money continues to flow to legal firms, referral agents and insurers. This might result in the formation of ABS companies where the business owners are drawn from the three affected business sectors and possibly incorporating financial advisors to mop up commission due on investments that are made on larger compensation or court of protection settlements.

Whatever the reason for setting up an ABS, the parties need to be aware that of how the new ABS’s will be regulated in respect of the sales of general insurance and investment business. Currently any legal firm that undertakes this work or derives income from the sales of these products is covered from a regulatory point of view by the Law Society. However the Law Society has said that they will not be responsible for these companies and therefore any ABS which wishes to profit from this type of income will need to seek authorisation from the FSA. (click here to view FSA Policy Statement) An application to the FSA for authorisation will further complicate and prolong the time that it takes for an ABS to be in a position to begin trading.

From a professional indemnity insurance point of view the ABS will still need to buy cover from the approved SRA insurers, however it will be important to ensure that the policy also covers professional indemnity risks arising from the fees generated by any work that is regulated by the Financial Services Authority.

Alternative Business Structure who need advice on Professional Indemnity Insurance can call PI Expert for help and advice. PI Expert specialises in Professional Indemnity for ABS firms and Solicitor practices.

/ By Jenny Carter-Vaughan / Latest News • Uncategorized/ • • • • • • / 0 Comments

Professional Indemnity Insurers Brace for Downgrade Impact

The news that the Ratings Agency Standard and Poor is considering downgrading the credit rating of a number of European Insurers will strike fear into the heart of the Insurance Industry in the UK and the Professional Indemnity Insurers that underwrite General Brokers and Independent Financial Advisor’s.

The underwriters under threat of a ratings down grade include household names such as Aviva, Allianz, Axa and Generali. RSA Ireland is also on the credit watch list. If the downgrade goes ahead they will join the recently downgraded Groupama, a well regarded medium sized insurer who has already seen their credit rating downgraded as a result of their exposure to Government securities.

The problem facing insurers is that to maintain their credit ratings, they have placed their funds in what has traditionally been considered as safe investments. The current economic crisis has changed the face of safe investments – investments in financial institutions, banks and government securities have been undermined, maybe irretrievably. Reinforcing this view, Standard and Poor have stated that the review of the insurers ratings will be based on their review of the Eurozone member governments.

It follows that if there is a downgrade in the credit rating of the government underwriting the securities then the insurers investing in them will also suffer a downgrade in their credit rating. S&P have stated that the rating review could see some insurers long term ratings lowered by as much as two notches.

The effect of Government Debt on the profitability of insurers is illustrated very well by the recent results published by Allianz. In November this year the firm announced a fall in third quarter profits of 80%, largely due to losses on Greek debt. To put this in perspective the German Insurer made profits of just 258m euros in the three month period, down from 1.27bn a year ago.

The Greek debt is the tip of the Iceberg, and exposure to Government debt in Italy, Spain and Portugal has yet to really play a part in insurers results. If S&P carry out their threat to down grade Germany, the Netherlands, Finland, Luxembourg and Austria by one notch and France by two, this will have a significant effect on insurers and could put pressure on solvency margins, leading to possible insurer failures.

For Insurance brokers and IFA’s these potential downgrades are significant cause for concern. The British Insurance Brokers Association recommends that members place cover where possible with A Rated insurers. As a rule of thumb to recommend an unrated insurer or one with a lower rating must be justifiable if a professional indemnity claim is to be avoided. Circumstances where this might be appropriate would include risks where no alternative insurer is available for example some solicitors Professional Indemnity or Surveyors PI cases or those where the only affordable insurance cover is unrated or low rated.

The fifteen firms affected by the S&P credit watch negative ratings warning involves some heavy hitters within the Insurance Industry and will make recommending insurance cover more challenging over the coming months. Brokers will have to consider how the Euro crisis could affect the rating of insurers over the period of the policy. Now, more than ever, it will be important for brokers to document the consideration that they have given to the financial security aspect of an insurer when making their recommendation – a factor which many brokers would not have even thought to question with the likes of Axa, Aviva or Allianz in the past.

IFA’s will need to be extra careful too- some of the insurers affected have a big exposure on the UK Life and pensions side as well as on the general market – Aviva, AXA and Generali are all major providers of Life Investment and Pension products to UK consumers.

Many Professional Indemnity Insurers look to see each year what the exposure is to unrated and lower rated providers as a rating factor when setting premiums. A broker or IFA who has made sensibly based recommendations during the year to what appeared to be strong financial institutions, could find that as a result of an insurer down grade, unforeseeable even three months ago, they have a portfolio of higher risk policies. This will affect Professional Indemnity Premiums.

The decisions take this weekend by the Eurozone leaders may well be a step in the right direction to strengthening the Euro and thus avoiding a crisis, however the will to push this through will need to be considerable and PI Expert is not convinced that this exists in either the politicians or the populations of the member states in the Eurozone.

For incisive help, advice and quotations on Professional Indemnity Insurance for Insurance Brokers and Independent Financial Advisors please call PI Expert on 01825 745 410

/ By Jenny Carter-Vaughan / Latest News • Uncategorized/ • • • / 0 Comments

PI Insurance – Falling Ratings Cause Concern

The current economic gloom creates an interesting environment for insurers. It is unusual for UK insurers to fail and this is largely due to the solvency margins that have been enforced by Government and the FSA over a period of years. This means that the UK is very safe place for people to insure their business and property.

One of the problems that the industry will face over the coming months will however be one of stability. The investments that insurers have used to maintain solvency levels have traditionally been regarded as very safe vehicles. However as he financial crisis has begun to bite one of the interesting features has been that these traditional safe investments have come under attack and this is having an effect on how they are rated by rating agencies.

Evidence of an insurer’s financial rating is key components that brokers should use in assessing and recommending cover. An insurance broker has a duty of care to their clients in selecting and recommending an insurer. In most cases brokers will look for what an insurer who has an A credit rating.

In recent times there has been an abundance of such companies to choose from, however if the current package of measures that have been put forward to save the Euro are unsuccessful, then a situation could arise whereby the gold plated A rating becomes much more elusive and exclusive. This could present an issue for brokers as the absence of a credit rating could leave them vulnerable to allegations of a breach of duty of care.

Like most brokers PI Expert has a policy wherever possible of recommending A Rated insurers. This is an essential not just for our client’s peace of mind and the professionalism that we bring to the deal, but also for our own Professional Indemnity cover.

Increasingly Professional indemnity Insurers who cover general insurance brokers are asking about the security of the markets used when granting cover and this is something that brokers will need to bear in mind over the coming months and years as the marketplace becomes more turbulent.