Legal expenses - Heading for the main line

If there is one thing you can guarantee the insurance market is expert in, especially in a soft market, then it is the talking up of esoteric products most clients have never heard of before and that many would rather do without.

Yet it would seem there is one product that actually needs to be marketed more, not less, if the results of a recent government report are anything to go by: legal expenses insurance. For, according to the Ministry of Justice in its recent report on the before-the-event legal expenses sector, there remains a considerable lack of information about the product both in the public domain in general and at the point of sale. Furthermore, the report revealed that awareness among lower socio-economic groups is particularly low, even though this group is the one that could benefit most from BTE insurance.

Despite the general lack of awareness of the product there are nonetheless encouraging signs, given that there has been a significant increase in the uptake of BTE insurance in the last couple of years. According to the MoJ, overall market penetration of the product had increased to 59% of the population at the end of 2007, compared with only 50% a year previously. With an estimated 28 million adults currently owning this form of insurance, albeit usually as an add-on to motor or home insurance, then one can hardly argue that it is a small volume line.

Despite such encouraging figures, it is important to discriminate between different aspects of the market, according to Andy Glynne, national sales director at First Assist Legal Expenses: "We are seeing a significantly greater penetration within personal lines, with motor-related BTE insurance at 90% levels of penetration, which is pretty much saturation point. However, for household-related BTE insurance the levels are not as high, though certain providers are either mandating provision or providing it as an opt-out."

Distribution

From the distribution point of view there is also a diverse marketplace, he adds: "As a company we deliver only through intermediaries, but there is a difference between intermediaries that see the benefit of BTE insurance and are prepared to work with it and those that don't. Certain brokers and aggregators have their own options rather than take the household carrier's option, so there is room for improvement."

Richard Finan, founder of Arc Legal Assistance, suggests there are other reasons behind why brokers may not be so keen to push household-related BTE products: "In terms of motor it comes down to whoever pays the highest referral fee gets the business. For household it depends on whether or not insurers broaden their product range. Whereas the income from household-related BTE insurance is only the income from premiums, the income from motor-related BTE insurance is the premium income plus earnings from the claims referrals, so there's more money to be made."

Most of the headlines surrounding legal expenses insurance in recent years have not been concerned so much with the BTE market as the after-the-event market. Since the groundbreaking Access to Justice Act was introduced in 1999, there has a been a plethora of arguments and counter-arguments as to the legitimacy or otherwise of the after-the-event marketplace, the appropriate level of success fee, and more recently the extent to which regulatory oversight should be introduced to police this sector.

Despite such a tumultuous period for the ATE sector, there is a feeling that the marketplace is finally settling down according to Richard Myrtle, managing director at ATE insurance broker Universal Legal Protection.

"It's stable, settled and maturing," he declares. "The challenges are mostly in the past. There have been abuses but court cases have settled issues such as inflated costs and middlemen that don't add value, who have since been flushed out. The battle nowadays is with the defendant insurers that feel they are being ripped off, but I see cases that come in where the defendant hasn't settled and as soon as the claimant buys an ATE policy the defendant settles."

"Spurious litigation funded by ATE insurance has been filtered out and ATE insurers are a lot more savvy now," he continues. "They have grown and matured and are now making money. The reason the number of insurers isn't huge is because most insurers are defendant insurers and don't want conflicts, so a defendant insurer entering the ATE market can create conflicts at board level and among their shareholders as to why they are also becoming a claimant insurer."

Growth

The market is still growing slowly according to Myrtle, though, the reason for which is a reticence from some sectors of the legal profession: "It's hard work because a solicitor is an integral part of the chain; if they are nervous, unsure or ill-informed then they will do anything but consider ATE insurance. However, there's no reason for them to be like that. They should buy into it and over time more will."

However, he is not so sure as far as other brokers are concerned. Although he would love for the national brokers to distribute his products, he says that most are not interested because "it's seen as too much hard work, it's not their area and they have their own solicitors anyway".

Whether such attitudes are justified or not could in any case be made irrelevant if the government decides to press ahead and introduce sweeping changes to this country's personal injury system. The proposals, originally put out in a consultation paper in April 2007, would see the small claims track limit for personal injury cases increased substantially to £25,000 for all types of claims. This could mean that everyone, brokers, solicitors and underwriters, will have to sit up and reassess their attitudes.

IN BRIEF: LEGAL EXPENSES INSURANCE

Legal expenses insurance provides cover against the risk of making or defending a legal action, whether in court or not. It will pay for lawyers' fees and other costs arising in legal actions up to the limit of indemnity in the policy.

As well as being provided on a standalone basis, legal expenses insurance is commonly included in motor policies and increasingly so in household policies. It is often presented as a low cost addition when sold as part of another policy rather than as a discrete product.

Brokers are key to the sale of legal expenses insurance, which can be purchased either as before-the-event insurance or as after-the-event insurance. BTE insurance provides cover for legal claims that may happen and it is very often sold in the same way and at the same time as other annual insurance contracts. It is used very commonly as a way of bringing compensation claims arising from road accidents and from consumer contract disputes.

ATE insurance provides cover for a specified legal claim after the disputed event or accident has happened. Essentially, it protects the policyholder from the risk of having to pay their opponent's legal costs in that dispute. It often sold through legal representatives who are using conditional fee agreements.

According to the Association of British Insurers, a significant amount of legal expenses insurance is written in the Lloyd's insurance market. The Ministry of Justice estimates that 28 million adults in the UK have some form of legal expenses policy.