Impact assessment

Review of the assigned risks pool

Business unit: Policy (inclusion)
Date:  January 2010

Introduction

We are currently consulting on the future of the Assigned Risks Pool (ARP), the system under which solicitors who are unable to obtain insurance cover on the open market are given temporary cover to enable them to remain in practice. The closing date for responses is 12 February 2010.

The ARP is underwritten by all the Qualifying Insurers and acts as a safety net for firms that got into temporary difficulty by providing them with up to two years to address their problems and to obtain cover back in the open market. Qualifying Insurers are required to sign up to an agreement with the Solicitors Regulation Authority (SRA) (as the regulatory part of the Law Society) and Capita Commercial Insurance Services Limited, managers of the Assigned Risks Pool (ARP), under which they agree to issue policies that comply with the minimum terms and conditions set out in the Solicitors' Indemnity Insurance Rules and to participate in the ARP.

The arrangements also provide an opportunity for the SRA to assess the risk posed by each ARP firm and to take appropriate regulatory action where necessary. In this way the decision whether a firm should continue in practice rests with the SRA as regulator rather than with the insurers.

Until recent years, the current arrangements have provided a high degree of protection to the public and profession at a comparatively low cost overall.

However, the SRA is reviewing the scheme at this time because of concerns that have been expressed about the ARP by a number of stakeholders. The number of firms in the ARP has increased dramatically in recent years - from 28 in 2007/08 to 166 in 2008/09 and the latest estimate for 2009/10 is 270.

Overview and aims and objectives of the policy review

The SRA's Financial Protection Committee (FPC) recognises that the ARP is putting a very good scheme under stress and urgent steps need to be taken to alleviate the pressure.

In undertaking this review the Committee has the twin objectives of preserving client financial protection and maintaining a sustainable competitive market for solicitors' compulsory professional indemnity insurance.

The FPC is in the process of consulting on three proposed changes as follows:

Proposal 1 - Cease issuing ARP policies

• With effect from 1 October 2010 the ARP will cease to provide ARP policies, save to firms already covered by the ARP. Firms that are insured by the ARP as at 30 September 2010 and which under the current rules are eligible to be insured by the ARP for all or part of the indemnity year 2010-2011 may, if they wish, be insured by the ARP.
• Any existing firm that can not obtain insurance, after a short period of grace following renewal, would be required to close or face intervention by the SRA (in effect, closure).
• The last insurer would then provide run-off cover for the next six years.

Proposal 2 - New firms will not be eligible to be issued with an ARP policy after 30 September 2010

• The ARP will accept applications from existing firms provided that they have previously been insured by a Qualifying Insurer. It will not accept any firm that has not previously held Qualifying Insurance in the commercial market.

Proposal 3 - Reducing the maximum period a firm can be in the ARP

• The maximum period in the ARP should be reduced from 24 months to 12 months.

Key stakeholders

In addition to the Law Society with whom we are working closely on these proposals, the key stakeholders who will be affected by the proposed policy changes are as follows:

Solicitors firms, including incorporated practices and LLPs

From the profession's point of view there is concern on the one hand that the costs of the ARP are passed on to the profession through higher open market premiums. On the other hand, there is also considerable concern among firms who are struggling to obtain insurance on the open market that the closure of the ARP will remove their safety net and force them to close.

Consumers of legal services

There is concern that too many 'bad' firms are surviving because of the ARP, when they should in fact have closed. Clients are more likely to have cause to make a claim against a bad firm and so are disadvantaged even if the ARP provides the same degree of public protection as Qualifying Insurance provided by a market insurer. It is also of concern that the increasing costs of the ARP may ultimately be passed on to clients in the form of higher fees.

Qualifying Insurers and brokers

Insurers have voiced concerns at the increasing cost of the ARP that they have to bear under the terms of the Qualifying Insurer's Agreement and the lack of control they have in relation to their ARP exposure. There is a concern that the ARP entitles high-risk firms to continue in practice when it would be better that they were closed. Loss ratios (that is the ratio of value of claims incurred to the value of premium income received) for the last nine years is currently running at close to 600% necessitating regular cash calls on the Qualifying Insurers.

Analysis of available data

We recognised early on that we need to conduct a full equality impact assessment of the proposed changes to the ARP and that work is underway and includes the full public consultation exercise.

The consultation document provides much of the data that we have available at the present time and we identified within that document the potential adverse impact on BME firms and asked respondents to identify the equality and diversity impacts of the proposed changes. This will of course be an important source of information for us in concluding the full equality impact assessment.

We are continuing to gather further data and our conclusions from the data that is available to us at the present time is set out below.

Statistical data about the ARP cost and claims made

This data is set out in the consultation paper, in particular at Annexes 1 to 4. The data illustrates the rapidly increasing costs of the ARP in recent years.

Numbers of firms in the ARP, broken down by number of partners and by the firm's ethnicity, gender and age

The graph at Annex 7 of the consultation paper shows the number of firms who have applied to join the ARP since it was created and in particular illustrates the significant increase from 2007/08 onwards.

Annex 5 shows the number of firms that have applied to join the ARP since it was created in 2000, broken down by the number of partners. This illustrates that the vast majority of firms are sole practitioners or 2 partner firms (96% in 2007/08 and 91% in 2008/09). We know also that BME solicitors are disproportionately represented in sole practices and small firms (4 or fewer partners).

We have also broken down the data by ethnicity, age and gender of the firm. The criteria for determining whether a firm falls into one of these equality and diversity categories is based on whether the number of practising certificate holders in the particular category within the firm is more than 50% of the total practising certificate holders.

Annex 8 shows the number of firms within the ARP from 2006/07, broken down as to firms classified as BME. The data confirms that there is a disproportionate number of BME firms in the ARP – in 2008/09, BME firms represented 10% of the overall firm population but have represented 30% of firms in the ARP for more that 30 days and 28% of those in for more than 60 days. We have also conducted more recent analysis of data for 2009/10 and it is clear there has been a further proportionate increase in the number of BME firms within the ARP (as at 8 December 2009 there were 42% of BME firms in the ARP as compared to 11% for this period across the whole firm population). This clearly indicates that any proposal in relation to the ARP is likely to have an indirect disproportionate impact on BME firms.

In terms of gender, 17% of ARP firms fall within the classification 'female' (compared to 24% in the overall firm population) and 65% are classified as 'male' (compared to 64% in the overall firm population). There does not seem to be any significant disproportionality in terms of gender.

In terms of age, it is the young members of the profession (under 41) that are over represented in the ARP. A total of 26% of ARP firms are classified as under 41 as compared to 12% in the overall firm population which is also indicative of a potential for adverse impact for solicitors under 41.

Information from meetings with stakeholders

The review of the ARP has been conducted at the request of the SRA’s Financial Protection Committee (FPC) by a working party which has met with a number of stakeholders including those listed below, to better understand their concerns both before the proposals went out for public consultation and since.

Qualifying insurers

At meetings with Qualifying Insurer representatives held in 2009 the insurers raised a number of concerns about the operation of the ARP and the way in which the SRA regulates high risk firms. Their principal concern was the uncertainty around the ARP and the fact that they are obliged to underwrite risks over which they have no control. Other concerns were that new firms can obtain cover through the ARP and the ARP was being used to prolong the existence of failing firms. They also felt that the SRA was too slow in identifying and dealing with high risk firms which had the effect of increasing the number of firms in the ARP.

The Law Society

The Law Society representatives agreed with the need for the consultation and agreed to participate. They also raised the concern about the non-payment of ARP premium. They suggested that part of the problem was the inflexibility of the definition of "successor practice" (which is the subject of a separate but related consultation.

BME solicitor groups, Lawyers with Disabilities and sole practitioners

It is clear from the meetings held with representatives of various minority groups and small firms (in October and December 2009) that there is increasing concern about the problems some firms had experienced in getting insurance. There is growing anecdotal evidence to suggest there may be factors operating against BME firms in the professional indemnity insurance market. As a result, it was felt by many representatives that it was important to find out what was happening on the insurance market and why so many firms had entered the ARP in recent years. The feeling expressed was that it was not the right time to scrap the ARP. Many felt that there were 'good' firms in the ARP who should be given the benefit of that safety net, but the SRA should find ways of ensuring that the 'bad' firms are expedited from the ARP as soon as possible.

Further information that is being sought through the full equality impact

Equality and diversity profile of the profession

At this stage, we do not have sufficient data to produce meaningful statistics in relation to the other equality grounds (disability, sexual orientation, religion or belief). We have recently concluded a diversity census asking solicitors for data across all equality grounds but have not yet been able to analyse that data although we are aware that the response was not as good as we were hoping. We will review the data and consider whether any meaningful analysis can be undertaken in relation to the other equality strands.

Understanding why the ARP firms were unable to obtain cover in the open market

We have commissioned some research to understand why firms have not been able to obtain insurance on the open market based on the information collected at the time of entry into the ARP. However, as the information is fairly limited, we do not expect to fully understand the reasons from the outcome of this research.

We are proposing to conduct a survey of all current ARP firms to identify why they have been unable to obtain insurance on the open market and through this will seek further evidence of the suggestion that there is racial bias in the insurance market.

We are aware that the Law Society is conducting some research about the ability of firms to obtain professional indemnity insurance and propose to engage with the Law Society and hopefully take on board the outcome of this research.

We monitor all firms in the ARP in one way or another and the record of the monitoring activity will be reviewed to better understand the profile of the firms in the ARP. For example, we can identify how many firms already have regulatory action being taken against them and the nature of that action.

Potential impact of the proposed policy changes

The statistics and evidence gathered through meetings in particular with BME stakeholders suggests that all 3 of the proposals put forward in the consultation document have the potential to have indirect adverse impact on race equality and to a lesser extent age equality.

We do not see any potential impact for human rights at this stage but will be considering this aspect further and reporting further in the full impact assessment.

The firms currently in the ARP are not going to be directly affected by the proposals, as all those who are eligible for a second year will be entitled to stay within the ARP for that period. However, it is fair to assume that a similar range of firms (including the disproportionate numbers of BME firms) are likely to require cover through the ARP for the 2010/11 insurance year.

The work we have identified as part of our full equality impact assessment will seek to better understand this potential adverse impact, and review whether we can find any further evidence in relation to the other equality grounds. We will also be considering whether there are any actions that we can take to minimise that potential adverse impact and whether the adverse impact can be justified.

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