The days of lunching insurers for legal work have long gone. Ralph Savage looks at how panel arrangements have changed the face of relationships between insurers and law firms
Ask any law firm that considers itself an insurance specialist how important panel work is, and the same answer will be heard time and again. Everything is dictated by the insurer's panel and if a legal firm is not on it, it is difficult to be appointed. Without that relationship, the firm will get little or no instructions.
The current climate sees significant players like Norwich Union and Axa reviewing their defendant legal panels, while a claims legal services review by RSA was completed towards the end of July. QBE revamped its panel during 2006 and 2007 following similar moves by Allianz and Zurich in 2004 and 2006 respectively. Generally speaking panel numbers have reduced, but opportunities remain available in certain circumstances, driven by regional expansions from the likes of Brit Insurance, which plans to appoint two law firms from a shortlist of six by Christmas. With the combined annual legal spend of a firm in RSA's league reportedly around £3.5m it is easy to see why practices clamour for such lucrative business.
The question of how regularly these panels are shaken up gets a varied response. NU, for example, has not revisited its legal panel of more than 35 advisors since 2003, while Zurich will not reassess for at least another year or two according to its legal panel manager Scott Balfour, who points out that the review being conducted by Zurich's general counsel Neil Hodges refers to its corporate advisors at a company level rather than any work handling insurance claims.
There has been a significant period of upheaval and reviews involving many of the top insurers during recent years often resulting in dozens of firms dropping off their lists as the number of advisors in many cases was cut by half. However, Anthony Hughes, head of the defendant personal injury team at DWF and vice-president of the Forum of Insurance Lawyers says there is no sign of the heat being off now that panels have slimmed down.
"I don't think we can assume panels have settled down," says Mr Hughes. "Competition is still very fierce among the law firms - if you compare the legal market with large accountancy practices you see 40 to 50 companies in our market and far fewer in the accountancy business. This is good for insurers. Insurers want better value and know they can get this the more work they send to particular firms."
Dan Cutts, partner and director of insurance at Weightmans, recalls how things were: "When I started, you would take a claims manager out for lunch and get a case the next day. Now it is almost entirely panel driven, by a combination of claims and procurement professionals."
Kevin Finnigan, partner and chair of the insurance division at Halliwells, adds: "20 years ago as a law firm you might be servicing about 30 insurance companies. However, the globalisation of the insurance market has reduced the number of insurers themselves and their panels, which may have instructed 20 or 30 law firms, now typically have a panel of five or so."
Richard Curd, partner in the insurance and reinsurance department of CMS Cameron McKenna, reveals some panels were literally huge: "We have found that an increasing number of insurers have been set the task of reducing the number of law firms they use and/or legal spend, in order to adopt a partnership approach. We have seen examples of insurers being asked to reduce their legal panel from anything up to around 150 down to around five."
The tender process is now typical fare for those aspiring to join a panel and Rob Townend, director of commercial and supply at NU, explains this is a lengthy process: "Our current panel review began in quarter one and will be complete by the end of the year. Typically we put the work out to tender in order to create a level playing field and put out our requirements to discuss those with all the providers that have asked to bid."
The net result is law firms today will place much more internal resources on dealing with tenders. "There is always a part of the business that is out for tender, it becomes part of daily life at a law firm like ours," adds Mr Cutts, who echoes Mr Curd's point that these are increasingly viewed as partnerships so many of the questions in tenders are geared towards the sustainability of a law firm's business, not just its legal pedigree.
"It's about constantly making sure you have everything covered - things like corporate social responsibility, people policies and disaster recovery plans, HR policies, discrimination policies and so on. It probably comes from a greater awareness on insurers' part about regulation and because we are working more closely with them, anything untoward would reflect poorly."
Contracts themselves have become more prescriptive, and law firms' performance from high volume process-driven work in fast track cases all the way up to complex litigation is measured carefully depending on the client's key performance indicators. Roy Hebburn, divisional claims manager technical at Allianz, explains: "We have KPIs such as in the fast track band where if more than 20% was being spent across a basket of cases by a particular firm on cost then we are probably spending too much money on them."
Allianz is into its fourth year with a six firm panel, which was reduced from 12 in 2004, a decision that Mr Hebburn says was due to a fall in litigated cases. He adds that some relationships, like the one the insurer has with Beachcroft, have existed in one way or another since the insurer itself began trading 100 years ago, but the modern climate means no firm is safe from the axe if standards fall. "We have not gone out to tender since 2004 and don't propose doing so at the moment. That's not to say we never would, but it is important to be careful as legal services is part of the product that we sell."
Neil Joslin, claims technical manager at Groupama, also emphasises the importance that long-term relationships have had. The company operates a panel of eight lawyers, with firms like DWF in tow, but Mr Joslin says the insurer is different as it will not wield the axe and channel its work through an ever smaller handful of advisers.
"Some of the firms on our panel have been working with us for 20 years. We don't often appoint new firms onto the panel as a result - we are not interested in piling high and selling cheap. While we have some big names on the panel and other less well known, we won't use a national firm on a national basis. We prefer relationships with individuals that we have built up over the years. They know our business and our handlers very well. We also retain quite a high level of expertise in-house, which means we perhaps don't send out as much work as other firms."
At the opposite end of the scale, NU's dizzying array of relationships sees almost 40 firms being instructed on its current panel. So why does NU operate such a large panel when its peer group has downsized so much in recent years? "I didn't know we did, but I think some of that is through the mergers and acquisition history of Aviva," says Mr Townend. "We select our panels around their capabilities to support certain types of work but we will look to consolidate if they have the skills. A lot of our panel review revolves around looking at price, how they manage our indemnity spend on our behalf - obviously it's not just about their fees, there is a big chunk of loss cost that they are managing.
"In highly technical areas such as disease, we'll seek out expertise in that arena and what litigation skills they have in-house. Where it's the high volume, low cost whiplash-type claims we'll be searching out good processes."
As with most mature markets, the law firms answering tenders for business from insurers have some important decisions to make about their pitch; how do they price their services overall, how do they position themselves as a firm? Are they seeking an appointment as a generalist or specialist? Mr Townend suggests there is a need for both.
However, Stephen Roberts, UK claims manager at Brit Insurance, says some law firms have no clear identity of what they want for themselves. "Rather than a law firm approaching me with an incoherent message saying 'we love you Brit, we can do it all just give us the work', what interests me is to have a firm approaching me and to say this is our skill base and where our expertise lies and to ask us 'do you have work like that?'"
Presumably there are opportunities for law firms to approach clients in this way, and it can be safely assumed the phones are red hot at the offices of Mr Townend and his boss Dominic Clayden at NU while tenders are ongoing. But money talks and in a market where hourly rates range between £60 for solicitors to some way north of £180 for senior partners, there have been some pretty extreme examples of law firms having to play limbo with insurers' pricing demands.
Bupa reportedly encouraged an e-auction approach when negotiating on price, showing tendering firms the quotes from their competitors and asking them to match or beat the bid. Mr Cutts responds: "There's always been an element of that where the client may say 'your presentation was well received, we liked your tender, you were a little expensive, can you bring the price down a bit?'"
And Mr Hughes admits that he has heard about the e-auction but only in very high volume areas such as domestic conveyancing and remortgaging for retail banks. "I think the danger is that if someone was to get their calculations wrong and pitch in at a level that was unsustainable it wouldn't do the customer any good," he says.
But pricing models are evolving, according to Mr Finnigan: "We are trying to move towards annualised fees and believe insurers are interested in fixing their own costs. We audit everything and continue to record time, but by maintaining transparency you provide a fixed price for an insurer's legal spend."
Being at the mercy of panels is both a source of great satisfaction for law firms and one that conversely creates an atmosphere of anxiety. Mr Hughes says it is something Foil is attempting to address as he says insurers rarely acknowledge a collective voice from insurance lawyers. "When they are taking a hard line on pricing, they assume we can cope with it because there is no representation to the effect that it's causing a difficulty. It's something where we do need to find a way to move forward," he says.
Further pressure could also be placed on law firms if there is a demand from the market to compare competing services. What if performance was to be benchmarked and figures published? "We welcome any form of benchmarking," says Mr Cutts. "The problem is, how does one compare like for like - for example, when you are asked what proportion of your cases do you settle, what proportion of cases do you win, or how long do cases stay in litigation. It's impossible to compare. How long stuff is in litigation depends on the client's attitude to litigation."
Mr Townend agrees: "It is a tough ask. Law firms are all operating to different processes for different insurers on different types of work but our requirements aren't always the same. I'm not sure we all have the same key performance indicators - whether we want more claims settled or whether we want more investigation."
Broadly speaking, insurers seem unconcerned about rising costs or a lack of value from their defendant legal advisors - indeed, Mr Hughes suggests rating structures have remained flat for a decade and efficiencies have been enhanced. Meanwhile, insurers' own claims functions are becoming less well resourced as the major players make cutbacks and redundancies, which gives law firms opportunities to operate as a safety valve for clients when claims volumes rise.
Pressure on fees is intense and Foil's call to arms for some collective action suggests a market that feels it has yielded enough ground to insurers. However, lawyers are in a privileged position according to Mr Roberts, who says they should spare a thought for their peers in the loss adjusting market: "Lawyers have maintained a value to their product. Adjusters have difficulty attracting the right level of staff, and despite the fact they are exponents of similarly complex requirements by insurers, their pricing doesn't necessarily allow them to attract the right people at the front door from university."
The net result is a long term deskilling in the adjusting sector, which is of concern to all but ironically, it explains partially why lawyers remain, as one famous strap line once said, 'reassuringly expensive'.
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