Research Trends and Conclusions: Insurance & Reinsurance 2012
With the benefit of over 14 years of research and tens of thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the insurance and reinsurance legal marketplace worldwide.
Despite predictions to the contrary and an unprecedented year of losses, the insurance market has altered very little over the last year. Commentators noted that the “market is long overdue a shake-up” but when this will occur is difficult to predict. 2011 was the costliest year on record for the insurance industry in terms of natural catastrophe losses, with Munich Re stating that insured losses totalled $105 billion, exceeding the previous record set in 2005 of $101 billion. In real terms, this should cause premiums to rise and the market to harden but the insurance market has demonstrated how much capacity remains and bucked the trend.
This stagnant state of affairs is reflected in the legal market with lawyers reporting that reinsurance litigation is at an all-time low and big-ticket claims, such as asbestos, are winding down, with no new wave of claims yet to be identified. In spite of this, firms with a diverse practice incorporating regulatory and transactional work have found their activity levels rising in the run up to the Solvency II Directive, and anticipate this area becoming even more active as the deadline looms.
It remains widely agreed among those in the market that insurance and reinsurance litigation is at a historic low and that waves of high-value claims -– such as “the legacy of asbestos” cases – are dwindling. In the face of this contracting market, litigators are seeing their cases becoming increasingly quirky and novel, which is certainly providing lawyers with interesting work and requiring litigators of the highest calibre.
The last few years have seen an increase in the number of insurance companies that are resolving their disputes through settlement and ADR methods, recognising the need to work together with other parties in the future. This has lead to “a definite uptick in the use of mediation” by parties but has also contributed to the decline of litigation.
Interestingly, many litigators commented that arbitration is not as popular with clients as it has been in the past and that its heyday has passed. What were once the advantages of arbitration – a less expensive and quicker process than litigation – are now its negatives and clients are coming to terms with the fact that its advertised benefits are not necessarily so. Where contracts allow clients the freedom to choose, some lawyers said that their clients have opted for litigation. However, as one lawyer put it: “People are in love with arbitration if they win; they hate it if they lose.” One advantage of arbitration that remains popular with parties is the confidential nature of the proceedings. Further criticism of arbitration lies in the fact that decisions can only be appealed under limited circumstances and they do not create precedents.
In the US, litigation remains more buoyant and in the wake of the financial downturn the financial lines have been an active area – directors’ and officers’ insurance and errors and omissions being the most prolific.
The number of natural catastrophes that occurred over the past year and the scale of the disasters they caused has been keeping certain lawyers very busy in the property casualty line. Furthermore, business interruption and contingent business interruption cases became increasingly common following the disruption to supply chains by the Thai and Japanese disasters, regions where many manufacturers are based.
CORPORATE/TRANSACTIONAL AND REGULATORY
One of the main drivers of corporate and transactional legal work over the past year has been industry regulation.
Solvency II, the EU legislative programme that aims to harmonise the insurance regulatory regime across member states is providing EU lawyers with a considerable amount of work advising not only EU companies but also US insurance companies with European subsidiaries who require advice to ensure their counterparts are compliant. Basel III remains a further concern for insurance companies as it lies at loggerheads with Solvency II. Basel III requires banks to improve their liquidity and raise funds for a longer period of time while Solvency II places a higher risk on long-dated corporate bonds discouraging insurance companies from investing in this type of debt. There remains a long way to go until bank regulators convince insurers to purchase new securities which are aimed at bolstering banks’ capital.
Lawyers noted that they have been advising clients on how best to structure their businesses to be compliant and meet the capital requirements. For many companies this has meant consolidation within groups and reorganisations, examples being RBS and Chartis. Undoubtedly this piece of legislation will bring about a “significant overhaul of the whole insurance regulatory framework”.
Another consequence has been a rise in buyouts and dispositions of lines of business that are no longer profitable as companies return to their core focus. M&A activity in the health insurance industry has been of particular note and pension buyouts and de-risking has occupied a lot of lawyers’ time.
Lawyers are expecting more consolidation between groups as the market picks up and the Solvency II implementation deadline nears.
In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act has altered credit requirements for reinsurance and removed the need to qualify in multiple states, in addition to creating the Federal Insurance Office to monitor all aspects of the insurance industry and the Financial Stability Oversight Council that is charged with identifying systemic risks in the US financial services industry.
EXPANSION INTO NEW MARKETS
The developing world holds huge potential for insurance companies allowing them to tap into large under-served markets – it is estimated that 1.5 billion to 3 billion potential policies could be sold. Activity so far has been limited to the life and health lines but it is expected that property casualty lines will follow.
To cater to the potential customers in these markets, insurance companies are looking at developing new innovative products. An example of which is micro-insurance – a product targeted at the low-income market, in particular in Africa. Attention is also being paid to how the market can access these new products with discussion of policies being sold via mobile phones.
It is anticipated that the expansion of the insurance market will have a knock-on effect on the legal market, with disputes and transactional work continuing to grow in these regions – a trend that is displayed clearly by our research. Figure 1 shows the increase in the number of jurisdictions featured in our research with 10 more countries featuring in the results of the research this year alone highlighting the internationally recognised expertise of lawyers within the jurisdictions.
Furthermore, the growing middle class in Latin America has lead to a notably larger insurance market which in turn has lead to an increased need for “first-rate” insurance lawyers in the field. Figure 2 displays the unprecedented increase of 10 lawyers in the Latin America region.
Sources commented that as growth in these developing regions continues companies will start to interact on the international level inviting further legal expertise in the field and most likely allowing international law firms to take advantage of their wide networks.
The last year has seen the insurance legal industry undergo considerable change with the merger of Clyde & Co and Barlow Lyde & Gilbert, some notable departures from the market and changes to the provision of legal services being driven from the volume market.
Departures in the market and the retirement of some esteemed practitioners has opened the doors for new talent in the market. Our research included 111 new entries this year.
In the UK, changes to the provision of legal services in the wake of the Legal Services Act 2007 have taken off in the volume market where firms have been looking into alternative business structures, IPOs and potential tie-ups with insurance companies. In a price-sensitive industry, driving for cost efficiency is an important business consideration and it remains no surprise that the insurance legal industry is at the vanguard of these changes.
Many lawyers commented throughout the research that it will be interesting to see what effect this change has on the high value end of the market and whether some firms will have to make strategic decisions about which market they wish to operate in.
Insurance and reinsurance companies are historically known for their ability to drive a hard bargain, but our sources noted that clients are willing to pay for the high end work, recognising the level of expertise that they require for these cases and exceptional service that they are receiving. Although competition for the top-end work is said to be increasing, and being a recognised “name” in the insurance field is important to clients.
The leading firms in the research as displayed in Figure 3 show that those with the highest number of lawyers listed in the edition operate on an international level and offer a full service to insurance companies encompassing dispute resolution, corporate and regulatory practices.
Mergers in the international market
On 1 November 2011, Clyde & Co merged with Barlow Lyde & Gilbert (BLG) – the largest law firm merger to have taken place in the UK – creating one of the world’s leading insurance practices. Over the past century Clyde & Co and BLG have been two of the biggest names in the insurance and reinsurance legal market and a merger of this magnitude between two historic rivals caused a stir in the legal market. Both firms have long-standing reputations, a high number of dedicated insurance specialists and key industry clients.
Legal work in the insurance sector sits at two levels: mass market/volume work and high-end work. Most if not all of the lawyers included in our publication operate in the high-end market, working on niche cases and solving complex disputes. Volume work operates on a high turnover of cases/low cost ratio and the ability of some firms to standardise this process has priced others out of the market. Meanwhile, high-value work has become more competitive as litigation levels have fallen. There is some debate around which end of the market is more profitable but it is generally accepted that to excel at either end, a law firm must be committed to that market.
Turning to our own research, Chart 4 highlights that while in 2006 both firms were on a level footing in terms of the number of lawyers recognised for their international standard of expertise, by 2011 pre-merger, BLG’s listings had dropped to three whereas Clydes had risen to nine. As a result of the merger, Clyde & Co has gained valuable expertise and clients, and with its continued global expansion, the merger looks set to be a positive step for both parties.
Comparisons with other recent law firm mergers in the sector are instructive. The Lovells and Hogan Hartson merger, which took place in May 2010, did little to boost Lovells’ already pre-eminent place in the insurance and reinsurance market – our research from 2006, up until the merger, did not recognise any insurance and reinsurance lawyers at Hogan & Hartson. The firm has been named our firm of the year for the practice sector since the inception of the awards in 2005 up to 2011, and has a significant number of lawyers selected for inclusion each year from its offices in Europe and the US. One impact of the merger is the combined expertise and recognition of the firm worldwide: this edition sees lawyers selected from eight of Hogan Lovells’ offices, showing that the firm’s international reputation is growing.
The insurance and reinsurance legal market is on the verge of transformation. As traditional disputes run-out and new regions open up, it appears that an “overhaul” of the market is due at any moment. Regulatory developments are also driving changes to the industry forcing companies to alter their structures and refocus their lines of business. In this uncertain time, the firms with international and full service capabilities stand in good stead to take advantage of the developments as they occur leading their clients through the changing landscape.