Since 2021, the LSB has been undertaking work to understand the factors driving the professional indemnity insurance (PII) market for legal services providers.
Project rationale
The increasing cost of consumer protection in recent years was putting new pressure on the economics of legal service delivery – notably, the hardening of the PII market since 2021 had manifested in a sharp rise in premiums and a rise in excesses, and there was less capacity in the market as insurers looked to more profitable sectors. We were concerned that if this trend continued it could translate to increased costs for consumers and reduce the number of legal professionals operating in the market, thereby impacting access to justice. We were also aware of anecdotal evidence of a more cautious approach by insurers towards some innovative activities which could potentially limit innovation in the sector.
Project aims
The aims of the project were:
- to put in place a policy framework that strikes the right balance between an appropriate level of financial protection for consumers and ensuring the costs to the profession and consumers (with its associated impact on access to justice) is affordable and sustainable in the long term, and
- to enable regulators to address the root cause of the risks in the legal sector which are leading to high premiums
Project outcomes
This project sought to ensure that:
- All regulators have sufficient evidence and tools to (a) carefully consider whether to implement new or recalibrated financial protection arrangements (PII and compensation schemes) to protect consumers from harm while ensuring the costs to the profession and ultimately consumers (with its associated impact on access) is affordable and sustainable in the long term and (b) start to address the root causes of the risks in the legal sector which may be leading to higher costs.
- The trade-off between costs and protection of PII are better understood and more transparent, which may have an impact on the price of PII.
- PII supports innovation in legal services.
Project process
The project involved two phases: (i) evidence gathering, econometric analysis and research and (ii) the development of policy options.
(i) Evidence gathering
We undertook Public Panel research, which involved a mix of deliberative and quantitative research to improve our understanding and evidence base in relation to consumer appetite for risk and preferences in respect of the trade-off between levels of protection and affordability in the legal services market.
We also gathered data on premiums, excess fees, and insurance pay outs for claims segmented by area of law from insurers.
We gathered data from the SRA and The Law Society (TLS) on premiums and excesses to help to determine:
- Which characteristics of a firm (including area of law, business model, turnover etc) insurers take into account when setting PII premiums and the extent to which insurers have a common approach to certain characteristics
- The most significant driver of PII costs, and
- Whether certain activities by the firms (such as notifying potential claims to insurers) or the regulator sharing information on firms with insurers (subject to consent from the firms) may mitigate premiums.
Alongside the SRA, we commissioned econometric analysis from Frontier Economics to determine:
- The main risks to insurers that increase PII costs, which regulators can influence
- The cost of PII and compensation schemes to firms
- The proportion of PII costs and compensation scheme costs which are passed on to the consumer for commonly used legal services such as conveyancing, divorce, and wills
- The elasticity of consumer demand for legal services, and
- The areas of law which are considered high risk.
We also asked regulators to provide data on the number and value of applications for grants, and data on grants made from their compensation schemes and data on the costs to the profession of maintaining these schemes.
Given the array of interested parties, regular and wide-ranging stakeholder engagement was a key element of this project. We had positive engagement with other professional services regulators whose regulated communities have been impacted by the hardening of the PII market, as well as the FCA and the CMA.
(ii) Development of policy options
In the second phase of the project, we used the findings of our research, analysis and other evidence gathering activities to inform the development of policy insights to support regulators to identify:
- how they can have an impact on the provision of PII, such as considering policy options on requirements for the provision of PII in the long term (ensuring there are no unnecessary regulatory barriers),
- implementing the most appropriate arrangements for the context in which they regulate, and
- how to make use of their regulatory levers to mitigate the risk factors that may be driving higher premiums.
Project outputs and publications
- Public Panel research report: Professional Indemnity Insurance in legal services – research with consumers, March 2022
This report sets out the findings of our Public Panel research with consumers in relation to consumer appetite for risk and preferences in respect of the trade-off between levels of consumer protection and affordability in the legal services market.
- Research report: Econometric analysis of professional indemnity insurance costs for legal service providers, September 2023:
The LSB and the SRA, commissioned research undertaken by Frontier Economics to analyse the factors that drive variations in PII premiums. The aim of the work was to consider the significance of insurance premiums in overall expenditure, the pricing decisions made by law firms, and possible regulatory actions which could alleviate concerns about consumer outcomes. The research report was published in September 2023.
3.LSB Insights Paper, July 2024 – Policy Approaches to financial protection arrangements:
This LSB insights paper, published in July 2024, sets out the key principles that should underpin regulators’ approaches to financial protection, including reducing risk, improving transparency and fostering effective competition. The observations in the paper are intended to support regulators to put in place financial protection arrangements that provide an appropriate level of financial protection for consumers that is both sustainable and affordable in the long-term.