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SRA reviews client protection by insolvent insurers

The Solicitors Regulation Authority (SRA) is reviewing the risk to clients when a firm's professional indemnity insurer gets into financial difficulties.

To be eligible to write compulsory professional indemnity insurance for solicitors, an insurer must be authorised by the Prudential Regulation Authority (PRA) or be an EEA insurer passported into this country to write insurance business. The SRA has always deferred to the relevant regulatory bodies to vet the financial stability of insurers.

The SRA decided two months ago, when Latvian insurer Balva first encountered regulatory issues in its own country, to review the current arrangements with a view to ensuring clients are not at risk should there be an insolvency event. If an insurer becomes insolvent, the insured firm would be able claim against the Financial Services Compensation Scheme if eligible, with indirect benefits for its clients.

In May, the SRA's Standards Committee agreed for further work to be carried out including an assessment of the full implications of introducing a financial rating criteria. The review will be completed in time for any decisions to be made for the indemnity period starting on 1 October 2014.

Agnieszka Scott, SRA Director for Policy, said: "We have always made our position clear on insurance companies; we don't regulate them, that is the job of others. Our role is to ensure that they are regulated and approved to provide cover in England and Wales.

"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."

From now until the end of September marks the final few months of a three-year period of change surrounding PII. A review of Financial Protection arrangements conducted by Charles Rivers Associates in 2010 suggested a raft of changes, some of which were introduced through the SRA's Financial Protection Policy Statement as agreed by the SRA Board in April 2011. Two years' worth of changes have already been implemented since the policy was agreed.

The changes for the indemnity year starting on 1 October 2013 are:

  • Removal of the Assigned Risks Pool - firms that cannot find open-market insurance by 1 October will no longer be afforded cover through the ARP, and instead will have a 90-day extension period with their last insurer. After the first 30 days, if no cover can be found, the firm cannot take on any new business and will be expected to focus on an orderly wind-down over the next 60 days
  • Alterations to the length of cover - for policies incepting on or after 1 October 2013 there will no longer be a requirement for policies to expire on 30 September. Firms will be able to negotiate any length policy they like, assuming their insurer agrees
  • List of insurers - as suggested by the Law Society, the Qualifying Insurers List will change its name to the Participating Insurers List. This is to remove any misunderstanding that the insurers involved have undergone any vetting by the SRA

More information on Professional Indemnity Insurance.

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