Since 2014 there have been three separate consultations by the Solicitors Regulation Authority (SRA), each proposing what can best be described as ‘commercial’ changes to the MTC.
What was proposed?
The ideas (over the years) put out for consultation included:
- £500,000 per claim limit (minimum)
- Conveyancing firms to have £1m minimum cover
- A reduction of run-off cover to three years
- A limit on defence costs/excess to apply to them
- A cap in the level of run-off cover required
- Extended exclusion clauses
- An aggregation limit (to avoid/limit sideways exposure)
When all the ideas are looked at, what was essentially being proposed was a radical overhaul of the ‘gold-plated’ policy. The stated intention was to reduce premiums. Interestingly, the response levels from the profession to each of the three consultations was ‘lukewarm’ to say the least. More recently, industry response has suggested premiums would not reduce as a result of the proposed changes.
As it happens, we are now in a hard market and premiums are on the rise. Capacity is less and, now the commercial market for insurance in this sector is mature (20 years in), the long-tail cost of the business is now far better understood by insurers. This is likely to mean that conclusions have been reached that in order to ensure a profitable return on the business, three factors are critical: i) volume; iii) pricing; and iii) longevity. A little bit like with stocks and shares, this market is not one you can easily dip in and out of and hope to do well.
Will anything ever change?
As we enter a new decade, it would be unrealistic to plan (or hope) for any significant changes to the MTC. For 6 years or more, some change had been anticipated by the insurance market, but to no avail (save for the fact that freelance solicitors can take out ‘adequate and appropriate’ cover). It is difficult to see the SRA credibly reviewing this area again during the next 5 years.
That said, some reflection may mean that more incremental change is a more realistic ambition. The level of change contained in the SRA’s various consultations, and Labour’s 2019 manifesto, have some similarities and both had good intentions. Sir Keir Starmer has recently accepted that the manifesto was ‘over-loaded’ and perhaps the SRA will stand back and reach the same conclusion.
The one change that had some real sense and attraction to it (for insurers, certainly) was the proposal to reduce the compulsory run-off period, or manage the level of run-off cover. Innovative thinking around this area could see change happen. For example, firms could be required to build up (using an escrow account) funds to meet run-off premiums in the event of cessation/the requirement to take out run-off cover.
In the short-term, that would be a significant cost to manage but a lead-in period could be allowed for, so as to build up funds. One of the biggest ‘hits’ an insurer takes is when a firm is intervened and cover remains in place for 6 years with no premium. Often smaller firms are named in this conversation, but recent history shows that larger firms are not immune to failure. The difference perhaps being that those firms (or more accurately their business) are then more attractive to be taken on by others, and with that successor practice rules may kick in.
Continuing the political synergy, at least we have some certainty of direction (for now).
However, it remains likely that the appetite for change will re-emerge in time. Perhaps the rationale for change itself needs to change. A primary focus was around on savings for the profession (ie it was stated that there was no need for the minimum level of cover to be so high). If the SRA were to approach matters from a different angle, different results may come from it. For example, the question to consider could be more focused on market capacity, and what changes to the MTC could open that up. By opening up the market (as a result of a less onerous policy being in place) the greater the likely competition for the business.
For now, it is business as usual.
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