Insurance law: gearing up for a car crash?

There will be some insurers that will have had their fingers burnt by the collapse of Parabis

Former DWF corporate partner Richard Britain, now head of transactional risk at Chubb, says consolidation among clients is inevitably leading to increased competition for panel spots, “because there are potentially fewer clients and clients are becoming more sophisticated”.

The recent demise of Parabis is an extreme example of what can happen when key clients move substantial amounts of work to another firm. According to the administrators’ report into the group’s collapse, two large insurers moved work away from the group to other providers.

This “led to talented fee earners leaving the group and a reduced ability to cover the costs of maintaining infrastructure, which did not reduce following the client losses” – a key contributing factor in the firm’s downward spiral according to the report.

Race to the bottom?

In such a competitive market fee pressure is inevitable. The increasing use of technology and of growing numbers of non-lawyers has contributed to a decline in fees as insurance companies try to cut costs.

Keoghs’ director of strategy Don Clarke comments: “Insurers are in a position where they have to be very tight on their expenses which has an impact on their suppliers in terms of pricing.”

This can be seen in the raft of job cuts among major insurers last year, with companies such as Willis, Ageas, Aviva and AXA all cutting jobs or relocating them to cheaper locations.

But while firms have been following the cues of their client in their attempts to secure work for ever lower prices, some optimistically claim that the race to the bottom on fees is now over.

“There may be a market correction or recognition by insurers that there is more in the value equation than simply price,” says DAC Beachcroft managing partner David Pollitt, [pictured right]. “There will be some insurers that will have had their fingers burnt by the collapse of Parabis.”

Clyde & Co partner Chris Murray adds: “Insurers are saying they don’t want to keep squeezing rates, they want long term strategic partnerships with people.”

Mike Brown, Manchester senior partner at BLM, also sounds a positive note: “We are actually getting some fee increases. I think some insurance customers are saying if we want to get the best blend of skills and technology we need to be able to pay for the law firms who do it properly.”

Over at RPC, the firm’s head of insurance, James Miller, suggests there is now a two-speed market, with lower value claims done on fixed fees, while bigger pieces of work can attract a decent rate. For firms targeting the bigger work then there is less risk according to Miller.

“On claims where the level of damages is sub £6,000-£7,000 there is a requirement for that to be done on fixed fee, but for bigger claims, although I am not whacking fees up, nor am I under massive pressure,” he says.

Some large insurance firms, such as Clyde & Co and Kennedys, have reacted to clients’ desire to keep costs low by reducing the amount of volume work they take on and handling lower value claims as efficiently as possible in order to focus on securing more lucrative mandates.

“The irony of our role is we are not only looking to resolve the cases but also to eliminate leakage to help insurers reduce the amount of work they send us,” Murray says.

Kennedys’ insurance head Nick Williams explains. “In the volume liability area our focus is on trying to help our clients need us less and use us less. We work on the basis that if we make ourselves attractive to our clients we will get an overall bigger market share.”

DAC Beachcroft meanwhile has set up a separate business to house its volume claims business in order to offer an end-to-end service at a manageable price.

2015 was the year that cyber came of age, real claims came through in substantial number and size

 New avenues

The increasing commoditisation of many aspects of insurance work and the drying up of disputes in areas such as reinsurance is also driving firms to diversify their practices.

BLM’s Brown says: “We have broadened the base of the work that we do for the insurance industry, we are doing more work in the healthcare sector, we are doing more in the public sector, we are doing more in the commercial world, more work for brokers and we are doing more work of an insurance and risk nature which doesn’t have an injury aspect to it at all.”

Others have targeted newer areas such as cyber in a bid to capitalise on the new threats facing corporations across the globe.

Kennedys’ Williams identifies the trend saying: “2015 was the year that cyber came of age, real claims came through in substantial number and size.”

Clydes senior partner James Burns agrees, noting that although the product has been around for a while it is only now that: “people are starting to buy significant amounts, previously they would have bought $5m of risk, now we are looking at towers of cover close to half a billion.”

Ince & Co senior partner Jan Heuvels [pictured right] explains that his firm is targeting non-traditional players interested in investing in insurance markets: “We are now developing relationships with equity funds and with banks, it’s this conflation of the traditional insurance markets and the capital markets that will drive the future of insurance,” he says.

Legislation, legislation, legislation

Between the continuing effects of LASPO, which brought into effect many of the Jackson litigation reforms including bans on referral fees and an end to the recovery of after-the-event insurance premiums, and the Insurance Act 2015, which comes into effect this summer, insurers and their legal advisers have been grappling with the impact of legislative changes for years. And it only looks set to get worse with Osborne’s plans to end cash compensation for minor whiplash claims – an Autumn statement announcement that sent Slater and Gordon’s share price plummeting. And if these were not enough, insurers also had to become compliant with the EU directive Solvency II, which mandates levels of capital held by insurers, by January this year.