Market Watch: The before-the-event landscape

There is arguably no segment of the insurance world that has had a more dramatic start to 2010 than legal expenses, a year that began with DAS announcing a £10m loss in 2009 and continued with the publication of the Jackson report on 14 January. With the full impact of the Ministry of Justice's reforms for low-value personal injury claims in road traffic accidents set to be released in April, the drama is set to run some distance yet. How did the market arrive at this point?

Richard Candy, underwriting director at Abbey Legal Protection, believes that the product's penetration has never been higher. He says: "As a class, we are growing up and becoming more main-stream. You are much more likely to have a legal dispute than a fire but everyone is more concerned about insuring against fire." With this in mind, he feels that the biggest challenge remains improving people's awareness of the product: "The perception is that it's an add-on. People don't know they have it and don't use it."

Abbey Legal's business has made an underwriting profit every year since its launch in 1992, though at DAS that is not the case: it made a spectacular loss in 2009. Paul Asplin, chief executive officer at DAS, explains: "Our top priority is to get personal before-the-event insurance back to profit." Asplin points out that premiums are at a historic low, so there is a lot of scope for their increase.

Yet putting up prices and explaining the process to business partners is not the only answer, according to Asplin. He cites the standalone sectors in Germany and South Africa as examples of how the UK market will have to evolve: "Does it make sense that the UK is on its own? Is the rest of the world wrong? I suspect not."

Asplin accepts that the approach will take a change of mindset both from the providers and the public - prices in Germany start at around €100 - but argues that the increasing popularity of aggregator services makes the development necessary. He highlights: "As aggregators grow, so fewer people take legal expenses insurance as an add-on. How can we work with them? Standalone insurance is probably the only way of selling successfully."

It is not, however, a view shared by everyone in the legal expenses community. Tony Buss, managing director at Arag, says: "Standalone is very unlikely to happen." He remarks that BTE has a saturated penetration of 75% in the motor insurance market and only approximately 25% in commercial lines, leaving great room for development. He continues: "Awareness of legal expenses rose in the 2000s due to the after-the-event market becoming well known. BTE came up as a reaction to it." Buss says that, because customers are used to the add-ons, for BTE "the standalone model doesn't work in the UK. The genie is out of the bottle".

Assured

Buss' confidence in the current system prevailing is such that he is planning acquisitions and, having trebled Arag's growth last year, aims to grow again by 25% across 2010. Buss believes part of DAS's decision is that "it needs to cover past losses, whereas we don't have any such baggage".

Helen Withers, managing director of Arc Legal Assistance, backed the idea that DAS' stance was incorrect. She comments: "In our view, the add-on model is working fine and I don't see the need for fundamental changes." Referring to the sums quoted for BTE by Asplin, she adds: "There is no consumer demand for BTE at that price model: consumers are used to buying add-ons. Legal providers have not historically moved into the consumer market and would need new retail brands."

DAS has seen an 80% increase in employment claims over the last two years. Whereas people would accept redundancy and a pay-off previously, believing that they would soon find another job, the recession has changed expectations. Growing awareness of the coverage provided by BTE has also led to an increase in claims, as have regulatory developments such as The Employment Act (2008) and greater understanding by employees of the procedures that companies must follow when making redundancies.

Statistics for 2008-09 from the Tribunal Service show a 29% increase in cases for unfair dismissal and 48% for redundancy pay. Withers says that Arc has also seen an increase but not in any way that would lead to a new business model: "We've seen a rise of 15% in employment claims but we can accommodate it within our rates: it's like an event in household."

Meanwhile, legal expenses insurance continues to evolve into new areas: looking to the future, Withers says that landlords are snapping up this type of cover. She explains: "The property market is active for rental and it protects landlords from tenants who stopped paying. The book of business is growing rapidly, rates are stable and the volume is rising."

Andy Glynne, head of product and pricing at FirstAssist Legal Protection, also believes that brokers should continue to look to commercial lines: "Out of home, motor and commercial, the biggest new opportunity is commercial. It has taken its time and now small business [buying] patterns are starting to come via packaged products."

Broader

Another who believes that opportunities exist for brokers to widen their horizons is Steve Rowley, before-the-event business development manager at Allianz Legal Protection. The company has noted that brokers have sometimes dealt with irate customers who failed to phone for advice before taking action to then find that their legal expenses policies were void. To help combat this, it launched Allianz HR Protect. Rowley says: "We are moving away from a reactive, bolt-on commercial legal expenses product to a service-led model that can be sold as an add-on or a standalone."

According to Rowley, the product has the key elements of legal protection but takes the communication process a step forward: "We have legal helplines but clients are also contacted regularly. The cover also offers health and safety inspections."

As reported in PB last month (p.8, Jan-Feb 2010, www.broking.co.uk/1589610) the Jackson report has stoked great controversy. Areas of legal expenses insurance such as liability adjusters and costs draughtsmen have been considered to be at particular risk from the proposals. Liz Garcia, head of costs at specialist liability adjuster Garwyn, says: "Fixed fees would impact most on cost negotiation firms in high-volume, low-value cases. Work that is fast-tracked. It is a quality issue: you will be left with professionals who can deal with highly technical cases."

Many weeks after publication, it appears that the dust has cleared a little, though two key questions for brokers remain: whether any of it will be implemented and the effect on referral fees (see p.22). Nick Garner, managing director at MSL, says: "Ultimately, the brokers would lose and they would need to build revenue from other areas. BTE premiums might have to rise to fund the claims process and they [brokers] would have to pass that on to consumers or squeeze margins.

"We are confident that an outsourced claims function remains the most cost-effective way for brokers to maximise their customer services."

It is fair to say that no single commentator has the definitive answer about whether or not Jackson's recommendations will be implemented. Garner believes that this means brokers should continue to focus on having communication channels open with their LEI providers. He says: "It may impact on our brokers and we need to work with them and plan for how things may change. It would be a big shift and there would be pressures on brokers and insurers. Brokers would need training, which we would provide through our external teams."

Glynne comments: "The overall view of this report is that it's heavily weighted toward cost reduction at the expense of access to justice. We have seen a number of these types of reports that don't go anywhere and if this does then it won't happen quickly."

With changes occurring in motor lines as a result of Ministry of Justice reforms and ongoing directives from the FSA, and little over a decade since the upheaval of the Access to Justice Act (1999), Glynne concludes: "We need to let a new regime run its course." Given the start to the year that legal expenses insurance has had, the sentiment captures a desire for stability, even if it is not expected by the market.