Government hopes that before-the-event (BTE) legal expenses insurance will take up the slack left by legal aid cuts and the end of recoverability – and that its cost will fall – are wide of the mark, a leading insurer has warned.
Phil Bellamy, group underwriting, ATE and special risks manager at DAS, told Litigation Futures that a wide range of factors are having a negative impact on the BTE market.
“The rapid growth in comparison websites has led to a reduction in BTE penetration via the traditional add-on route as cash-strapped consumers uncheck the legal expenses option in order to save £20 to £30 off their motor and household premiums,” he explained. “Eight years ago, BTE penetration was in excess of 50%; today it has reduced to about a third, with no signs of this trend stopping anytime soon.”
Pointing out that the net premium retained by BTE underwriters is often just a few pounds – “and very occasionally zero” – Mr Bellamy said this was only possible because of a number of critical factors, including: a relatively low claims frequency across the book; additional income from referral fees; strictly controlled costs through the effective use of economies of scale and panel solicitors; and carefully controlled exposures.
He said: “Tinkering with any of these factors, such as the upcoming ban on referral fees, or the [government’s] proposed publicity of BTE insurance, will ultimately lead to a negative effect on claims costs, and thereafter result in an increase in the net premium required by underwriters, and not the reduction in cost the government predicts.”
He suggested that it will take many years for consumers to realise that they could lose a portion of their damages in cases brought after April 2013, and only then will they consider the potential benefit of a £25-a-year BTE policy.
Mr Bellamy also questioned how solicitors will deal with their professional obligations when they discover a potential new client has a BTE policy offering a nil deduction from damages, while their firm’s new business model involves a 15%-25% deduction.
“How does SRA mandatory principle 4 – ‘You must act in the best interests of each client’ – fit in the new world?” he asked. “Is it based solely on a claimants expected retained damages? Or do other factors come into play, such as location, expertise or speed of settlement? And which trumps the others?”
The insurer said he has asked the Solicitors Regulation Authority for guidance on this, but has yet to hear back.