Edging out risk

What approach should solicitors and their brokers be taking in the current market? Risk management, risk transfer, understanding the market and approaching it in the right way will all help.

Good risk management dictates that brokers and their clients should identify the risks within their business and then analyse any possible financial effects these risks could have. Areas such as negligence, business risk and dishonesty pose particular threats when focusing on professional indemnity. However, it is not just these negative actions that pose a threat to firms - there are wider business risks too that must be recognised.

While the financial fallout from a successful claim may be severe, the loss of reputation - particularly for smaller niche firms - can be crippling. Increasing the pressure further, the Law Society is introducing new 'conduct of business rules' early in 2006, which will require law firms to demonstrate they have adequate risk management in place.

Though the rules have been widely anticipated, practices often find it difficult to know where to start. A good place might be to consider risk-management activity as a catalyst to filter business opportunities and maximise rewards.

There are many practical areas on which brokers can advise their clients to help with risk management. Firms need to get certain things right, specifically: strategy; clients; people; process; and culture, in order for brokers to understand the business and for insurers to find them a more attractive risk.

Fundamental strategies

Successful firms do things right and have a culture of success. This means providing clear direction to brokers and underwriters on the kind of clients the firm wants to attract, the people who are hired and the nature of the work performed. Disappearance of traditional work due to commoditisation, such as conveyancing, can mean the replacement of unique client relationships with faceless back-office purchasing functions, which reduces morale, affects the quality of work performed and, therefore, increases the likelihood of claims. Having a strategy in place that anticipates this kind of issue - and recognises the risk it presents - is fundamental to the long-term success of the practice.

Pressure to bill and drive up turnover at all costs is another danger that should be high on the senior partners' radar. Though growth is essential, it is not only achieved by focus on the financials but by investing senior managers' time in the development, training and mentoring of employees and partners. Pressure on billing puts pressure on relationships with clients and relationships with staff, which can mean firms take on the wrong clients and focus on billing at the expense of the bigger picture.

Every partner gets a boost from taking on a new client. However, first impressions tend to be lasting and it is important that solicitors like and trust the person with whom they are going to be working. There may be telltale warning signs of difficulties ahead if a case had already passed through one or more firms of solicitors; the recommendation came from a competitor; papers had been with another firm for an extended period; or if the solicitor's client is from out of the area.

Getting the basics right

Pressure for solicitors to maintain billable hours makes it hard to turn down work, but taking on a client for which the practice lacks the expertise and resources is not necessarily a good long-term move and may have a disproportionate impact on the firm's risk profile.

Even apparently good clients can also be a source of increased risk. Multiple instructions are a prized possession, offering a steady pipeline of work, stability of income, work for assistants, improved gearing and promotion prospects for the partner. However, too much of a good thing can lead to a reliance on one client and the temptation to compromise for the sake of the relationship.

Difficulties in risk management are not just client-side, however. People also play a big part in a firm's risk profile and its reputation. Managing the sole practitioners in the partnership who make a significant contribution to overall fees, own many of the key client relationships but typically resist pressure to comply with firm-wide processes and procedures is a challenge for most solicitors.

Far less defensible is the failure by the majority of practices to get the basics right. In a recent survey of the top-100 law firms, 64% of firms did not check disciplinary records, 31% did not check practising certificates, 19% failed to make a careful check of curriculum vitae and 11% did not take up references for new employees.

From an underwriting perspective, claims usually result from not doing things that are common sense - like checking who firms hire, making assumptions about quality, writing a good retainer letter or checking compliance with duty to warn requirements.

If firms are to protect themselves they need to comply with know-your-client rules, identify the client in the retainer letters and update the letter regularly to reflect the changing nature of the brief. The size and background of a solicitor's client will help define the extent of the duty to warn, but more case law is expected.

'Common sense' also extends to firms getting more of the obvious things right - like audits, training and supervision. Supervision and auditing of files is not always a strength, particularly among mid-tier firms. It is important to check partnership accounts, review time sheets and new client lists - actions that are essential to good risk management in every firm.

However, perhaps more important than all the systems and procedures in the world is culture. Claims experience shows that, no matter what system is in place, there is no substitute for time and this means that staff need to feel that no problem is too small or too trivial. An open culture in which senior staff are available to review and discuss issues, mentor and develop junior staff is the best defence against risk and also represents an investment in the long-term growth and development of the firm.

So, once a solicitor and their broker have fully understood the risks facing a firm and completed a thorough risk-management assessment, what next?

Knowing how to approach the PI market with a risk is key, and this is where a good broker can add immense value to their clients. Solicitors need to have access to a broker who understands the PI market and is able to understand the risks associated with each and every firm, market the risk effectively and approach the right insurers on a timely basis.

The considerations before approaching PI insurers may include: how consistent the insurer is in terms of underwriting approach and financial stability; how committed they are to the PI field; how long they have written solicitors' PI; how experienced the underwriter is; how the claims are handled; what approach the insurer takes to risks, for example, whether they quote on all risks; whether they understand your client's exposure; does the underwriter rate consistently; and are they just after market share?

Package of attributes

Being armed with the answers to these questions and being able to talk to clients about these issues could stand brokers in good stead. A survey earlier this year by consultancy firm Legal Risk, revealed that one in five solicitors had changed broker at last renewal - a potential sign of dissatisfaction at the level of information clients are receiving when it comes to their PI renewal and also a reflection on the expertise they expect from their broker.

Solicitors will expect a whole package of attributes to be demonstrated by their broker, in particular, quality of service, assistance with claims handling and understanding of the PI market. Being able to explain the relationship between risk management and resulting rates - and everything in between - is therefore vital for brokers to demonstrate in order to retain their clients. Interestingly though, the same survey revealed that solicitors did not change insurer as much as they changed broker. In fact they shied away from changing insurer - particularly for a significantly lower premium.

One of the most important experiences for any policyholder is that of claims handling. If and when it comes to claiming on a PI policy, firms should know how their claims would be handled. After all, what is the point of paying premium for a policy if you do not receive the service you need, when you need it?

Solicitors should understand how their insurer operates when it comes to sending in a claim. They should know whether there is an in-house claims team, which is more preferable, or perhaps even a nominated claims handler to deal with their specific needs - particularly a claims handler who is able to make decisions without having to get every decision signed off by several managers. There is also legal representation to which the client is entitled and added facilities such as free legal helplines. This needs to be clearly explained by brokers as part of the proposal process at an early stage - rather than an add-on at the end.

A combination of good risk management in solicitor firms and having a broker who knows how to approach PI insurers will help ensure that clients receive rates that reflect these two factors.

CHECK LIST

When choosing a PI insurer, brokers should check the following:

- How stable is the insurer?

- How long have they been established?

- Has their underwriting approach been consistent?

- Have they financial strength ratings and are they of good standing?

- How committed is the insurer to the profession?

- How long have they written solicitors' PI?

- What is the expertise of the underwriter?

- How will they handle claims?

- What is the insurer's underwriting approach?

- Do they quote on all risks?

- Are they pursuing market share?

- Do they understand your client's exposure?

- Have they been consistent in rating?

- Do they take account of size, growth, risk management within the firm, claims experience and geographical location?