In an article written for Modern Law magazine, Mark Carver advises conveyancing firms on how to negate their high-risk reputation amongst insurers.
What do insurers think of conveyancing risks and what can conveyancers do to reduce their exposure?
From an insurance perspective, there is a general consensus of opinion amongst insurers and brokers alike, that conveyancing is regarded as high risk.
Such concerns are well founded with conveyancing contributing the most in respect of the number of notifications and ultimate claims payments. For instance, for the period from 2004 to 2011, claims statistics highlight that over 43% of professional indemnity notifications and over 70% of financial claims payments, at an average; incurred costs (damages plus defence costs) of £41,000 per claim.
Many commentators will argue that such claims experience was due to the impact of the global economic crisis, but that the Jackson reforms will have had a positive impact to claims experience from conveyancing, and as such the claims position will have improved since 2013 onwards. This argument is not supported by claims statistics however, which indicate that whilst 2013 did show significant improvement with 20% of notifications and 16.5% of incurred claims derived from conveyancing, such improvement appears to be short-term with notifications in 2014 increasing to 45% of all notifications and 70% of incurred. Furthermore, the value of conveyancing claims has significantly increased due to the impact of claims inflation as a result of the 40% increase in property values since 2004.
Solicitors Compensation Fund
To get a true picture of the claims position, the claims experience of the Solicitors Compensation Fund, which is funded by contributions from all solicitors, and responds where the professional indemnity policy does not, should also be taken into account. In addition to the claims payments made by insurers, the Solicitors Compensation Fund has made in excess of £56m in payments from 2013, of which inevitably a significant amount will be related to conveyancing.
How conveyancing has impacted insurer approaches
Inevitably, this means that insurers will focus on conveyancing exposure. For solicitors, the impact can be seen in the underwriting strategy implemented by insurers which ranges from the extreme approach of not considering any risk with a conveyancing exposure, to imposing an income cap. For all insurers, it is fair to say that they will apply a higher rate for conveyancing exposure which in turn will lead to an increased insurance cost.
What is the insurance cost for conveyancing?
Whilst insurers will all apply different rates which reflect their underwriting appetite and claims experience, as a rough rule of thumb; we have observed that conveyancing attracts a base-rate in the region of 10%. This means that for every £10 earned from conveyancing, £1 will contribute to insurance costs. The number of properties sold in England and Wales was 38% greater in 2014 than in 2010 and early indications in the legal press indicate that conveyancers are preparing for another busy year. Whilst this is inevitably good from an income perspective, it must be remembered that this will result in increased insurance costs as insurers take account of the increased exposure.
How can solicitors manage their costs?
In theory, the professional indemnity market is just that, a market. With over 25 participating insurers, solicitors are not short of choice. Whilst unrated insurers should be discounted by conveyancers, there is plenty of choice for solicitors, no matter the size of practice. The most simple way for solicitors to manage costs is; seek an alternative quotation. At the very least this will enable them to make an informed decision. There are often very valid reasons for continuity of insurer, however, it is worth remembering that continuity is two way and should be rewarded by insurers.
Since the SRA abolished the common renewal date in 2013 an increasing feature of the insurance market has been the offering of early renewals, mid-term policy extensions and 18 month policies. If you are expecting your conveyancing income to increase then it would be prudent to take advantage of such offers to provide premium stability in the face of potentially increased exposure.
Insurance and risk management
For many insurers, brokers and indeed solicitors, professional indemnity insurance is no more than an annual transaction focussing solely on premium. Whilst it would be naïve to suggest that premium costs should not be a key consideration, for the prudent firm, the focus should also be on how to reduce and manage risk. Indeed, risk management is central to the majority of insurers underwriting approaches and has been embraced by the profession, with statistics indicating that 98% of firms (on paper at least) have what would be considered to be good risk management practices. Whilst statistics do not exist in respect of the quality of risk management for the period from 2000 to 2007, anecdotal commentary highlights that most brokers and insurers believe that risk management has greatly improved across the profession since the advent of the open market in 2000.
Has risk management worked for conveyancers?
A comparison of conveyancing claims statistics provides an indication as to whether risk management has worked or otherwise. Unfortunately this indicates that the number of notifications is consistent. For example; in the period from 2000 to 2004 (where in general terms it is acknowledged that risk management was variable), conveyancing accounted for 34% of notifications, which in 2014 have increased to 45% of all notifications. This is really a case of being a ‘glass half full or a glass half empty’. On the one hand; it could be argued that the number of notifications would have been greater without risk management, but on the other, that risk management has not had an material impact in respect of reducing claims.
What can conveyancers do to reduce risk?
We are certainly not arguing that risk management is irrelevant and not advocating that risk management should be ignored. Rather, our suggestion is that there are other factors which conveyancers should be aware of which we believe will have a positive impact on the management of conveyancing risk.
Risk and reward
We have long argued that at the heart of the problem for conveyancers is the concept of ‘risk and reward’. Whilst we recognise business pressure and the extremely competitive nature of the conveyancing market, from a risk perspective the reality is that the fees generated from conveyancing bear little resemble to the risk assumed. For example, the Post Office Money and the Centre for Economics and Business Research recently published that the average conveyancing fee in 2014 was £1,419 which, when inflation is taken into account, is less than the figure charged in 2004. Not only are conveyancers getting paid less than 10 years ago, due to the increase in property values by 39% (Average UK property increase), the risk that they assume has increased. Clearly insurance cannot solve this problem, however, we do believe that insurers should increasingly look at the average conveyancing fee, with those firms that can demonstrate above average fees being rewarded for less risk assumed on the basis that they are undertaking less work.
Experience and resourcing
Following on from and relating to the above, our view is that those firms which manage their workload, supervise staff and retain experienced conveyancers will reduce the risk of conveyancing claims. With the low cost and cyclical nature of the property market, it is understandably difficult to justify the investment in experience. A key error for many is they assume that conveyancing is simply a form filling exercise. The reality is different, with every conveyance having its own characteristics, as every property and client is different. Many of the claims arising from conveyancing we are aware of were the result of poor working practices and inadequate supervision. So whilst using less experienced practitioners is necessary to compete, to assist in the management of risk, conveyancers should not ignore the necessity for continuous training in respect of legal and regulatory issues, implement a system of best practice and proactive supervision by an experienced conveyancer and ensure that the conveyancing process is methodical with appropriate checks.
Acting for the lender
In the vast majority of conveyances, the conveyancer acts for both the buyer and the lender in the same transaction and, as such, the lender is also a client. In acting for the lender, the conveyancer will have to comply with the Council for Mortgage Lender (CML) Handbook. The CML Handbook is essentially a set of requirements or instructions, which in short must be complied with. Given that lender claims account for a significant amount of conveyancing notifications, from a risk management perspective it is prudent to have the relevant procedures and checks in place to ensure that such requirements are indeed complied with. Given that the CML handbook is split into two, with the second part relating to specific instructions of the individual lender, it is apparent from a risk perspective that this should be centrally controlled and monitored for compliance purposes. In our opinion, without such controls in place, the conveyancer could inadvertently breach such requirements. Therefore, it follows that the more controlled or less panels the conveyancer is on, the lower the risk.
Insurance and conveyancing
Conveyancing always has, and always will present increased risk to solicitors practices and insurers alike when compared with other areas of work. For the prudent conveyancer, existing risk management procedures should be complemented with a focus on the appropriate level of fees, the experience and supervision of staff and compliance with the requirements of the CML Handbook.