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UK solicitors' structural woes behind Chartis moratorium

American International Group's P&C subsidiary Chartis has withdrawn from writing new UK solicitors' professional indemnity (PI) business, amid claims that the Assigned Risk Pool (ARP) needs a major overhaul.

Chartis was the biggest insurer in the UK solicitors' PI market last year, writing £38.5mn of business and holding an 18 percent market share.

A spokesperson for Chartis cited the difficult post-recession economic climate and limited changes to the minimum terms and conditions of the ARP as motivating factors: "Regretfully Chartis has no alternative but to moderate the capacity it deploys in the sector and will not be writing new solicitors' PI business in 2011, preferring to focus on renewals within our existing book," a spokesman for the firm stated.

"As a long-term and major provider in this market we strongly believe that unless and until the structural flaws inherent in the market are properly addressed it will not be attractive to those providers who prefer a long-term commitment, with the consistency and stability that implies."

The firm was disappointed by the Solicitors' Regulation Authority (SRA)'s declaration in April that the ARP will not be replaced until October 2013, when a transition period elapses.

In the consultation with the SRA, Chartis advocated the immediate abolition of the ARP, arguing that: "The long-term sustainability of this market is best secured by insurers who are liable only for those exposures they elect to write.

"Insurers cannot continue to bear unquantifiable levels of risk from legal practices that they elected not to trade with," a Chartis spokesman explained.

The ARP is an insurance pool that acts as the insurer of last resort for solicitors that cannot obtain the mandatory cover in the open market.

The pool is funded by levies on insurers licensed to write solicitors' PI business. Insurers pay a percentage dependent on the amount of cover they sell in the UK market.

Chartis has an exposure of 17.4 percent of the ARP costs, according to figures from the SRA.

The ARP has cost insurers in excess of £100mn from 2005 to 2009, according to the firm's projections.

Since its inception in 2000 the ARP's loss ratio has rested at an average of 800 percent. In 2008/09 losses were close to £70mn and in 2009/10 the ARP paid out £55.8mn.

Approximately 85 percent of ARP claims arise from conveyancing work through negligence or failure to register a charge, according to a report by broker Lockton.

The problem is worsened by the volume of unpaid premiums, which account for 65 percent of total premiums due.

The ARP is required to pay claims even in cases where the premium has not been paid, in order to safeguard the interests of the public.

Even if all firms in the ARP had paid premiums, the total would not cover the level of claims.

The practice of creatively restructuring insurance programmes, known as ARP mitigation strategy, has become prevalent among insurers, adding to Chartis' displeasure.

The ARP levy is paid only on the compulsory £2mn or £3mn layer of coverage, but if an insurer is able to sell excess layers then it can allocate a lower premium to the mandatory primary portion and thus reduce the amount of premium on which the levy is charged.

This restructuring distorts the market share of companies that refrain from engaging in such tactics, as they believe them to be against the spirit of the SRA rules.

Hiscox and Ace have both withdrawn from UK solicitors' PI recently, while Zurich has significantly scaled back its business.

Steve Holland, senior vice president of professions for Lockton, explained that with many insurers' combined ratios near or exceeding 100 percent, underwriters are finding it difficult to justify to their boards why they should continue to be provided with capital to write business at a loss.

The broker also explained that the ARP was the key factor behind underwriter unrest:

"Many insurers thought that the ARP would be scrapped next year. The fact that this will not happen until 2013 has caused insurers to take a deep breath and debate whether they can sustain another two years of the ARP, notwithstanding that 2012 will see the cost of the ARP shared with the profession.

"At present, insurers are having to pay the ARP 20p for every £1 of premium written, which wipes out many insurers' profit on what would have been a healthy book of business."

Holland also feared that the lack of a pronounced UK housing correction may be storing up more losses for solicitors and surveyors in the future.

"Although lenders have been pursing solicitors and surveyors, many insurers believe that the worse is yet to come.

"The crystallisation of losses from the lenders' loan book has not yet happened on a large scale, mainly because of the historically low interest rates. Once interest rates begin to creep up and borrowers start to default on their mortgages, we are likely to see wholesale litigation against the professional advisers to mend the lenders' balance sheets."

Holland forecast that the next couple of years are likely to see claims from lenders accelerate as the limitation period to bring an action draws near for those transactions that completed in 2007.

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