Conditions haven't been completely kind to insurance firms of late, but the major practices are still staying positive - and with good reason

Specialist v big firm: the debate rages on' read the ALB headlines in our last insurance feature. And, while it is hard to avoid the boutique firm issue when discussing insurance practices, this year plenty of others are competing for attention - such as the need for insurance firms to diversify, the possibility of further regulatory change in the pipeline and, above all, speculation that the claims environment is about to change.

Claims environment

Greg Skehan, joint senior partner of Colin Biggers & Paisley (CBP), describes the claims work environment as 'tough'. "There's less of it around, and it's being offered at lower rates," he says. Skehan is, naturally, referring to the common trend in insurance work for some insurance companies to prescribe the cost of undertaking a particular piece of work, and it is a trend that worries him. "We think regard needs to be paid to the results that are actually achieved, and not necessarily the accounting considerations," he states. "It's a worry when you see bright young lawyers are dissuaded from taking up insurance work because of perceptions surrounding charge-out rates."

Colin Biggers & Paisley, for the first time, recently had to decline some lower end insurance work because of the prescribed rates. "Once it gets to the stage where we'd actually be losing money on the work, we really didn't have a choice but to opt out," says Skehan.

Richard Wood, managing principal at Gilchrist Connell, describes the claims environment as 'relatively static'. "The market has been fairly resilient in the face of the personal injury law reforms and we've seen a consistent level of claims volume," he says. But like many others in the industry, Wood is now convinced that the tide is beginning to turn.

Changing fortunes

While firms were not unanimous in their assessment of the current claims environment, there was a strong consensus that conditions are on the mend - and it is not just law firm spin. Geoff Connellan of Moray & Agnew says that there has been a rise in the notification of potential claims, particularly in the financial services sector, and "especially brokers and people involved in lending. It was triggered by the significant collapses we've seen recently," he explains.

Gilchrist Connell originated in South Australia, but these days the Sydney office is seeing the strongest growth. While personal injury and casualty claims work is down in NSW, the firm has seen an increase in professional negligence claims against accountants, land valuers and financial advisors, just to name a few. Wood says that he has noticed a tightening in the market for lawyers specialising in professional indemnity claims recently. "It's certainly been more expensive to make those hires of late," he says. The mix has helped the firm's insurance practice (under its current and previous branding) nearly double its revenue growth over the past five years, and there is no noticeable slowdown for 2008.

Wotton + Kearney is one firm which is not too concerned about the tide turning - but that is because the firm is already enjoying a strong year. It recently increased its partnership by one-third with the addition of three new partners.

However, partner Andrew Moore says there is more in play than simply a rise in the number of claims that is driving the growth - there is also an increase in their size and complexity. "There have been quite a number of significant claims arising out of financial collapses, and they often involve sophisticated structures which need to be unwound to determine just where the liability and/or loss lies."

Moore agrees that the notification of potential claims to insurers has risen, particular those relating to financial and professional advisors. "There's often a tendency to search for a scapegoat when things go badly," he says. He adds that personal injury claims continue to represent a steady source of work. "It is still an important part of our business."

Class actions are also gaining momentum. "The litigation funding companies have been active in recent times and have announced several of these - against Opes Prime, ABC Learning and Centro, to name but a few," Moore says. He is also keeping an eye on mooted law reform in Victoria, however, which may have the effect of making class actions easier to facilitate. "It's very early days yet, but certainly it has the potential to make Victoria a more attractive forum if it happens," he adds.

Diversification

Colin Biggers & Paisley is making a concerted effort to step up other areas of its insurance practice. "For example, drafting of policies and contracts, compliance work with brokers, designing new products, risk management and assessment, and underwriting projects," says Skehan. "This is the kind of value-add service that we want to provide increasingly." This line of work currently makes up about a quarter of the firm's business, but Skehan is hoping to increase it to around half.

M&A activity involving insurance companies peaked in 2007, although the deals are still continuing in 2008 (MBF-BUPA and Medibank-AHM, for example). Firms have advised on the insurance and risk allocation issues arising out of major project and PPP deals (see Table for more details).

Several years ago, when other firms were leaving the insurance market, Moray & Agnew made a conscious decision to stick with insurance - and part of the strategy to ensure the viability of the practice was to ensure that the firm diversified beyond 'high value' fields. "We've continued to cover areas such as workers' compensation and CTP," says Connellan, "and it's a strategy that has paid off because the level of work in them has continued to remain reasonably stable."

But the firm is relatively lukewarm about going down the risk management path. "Certainly, there's a role for firms to look at risk management on a claim-by-claim basis - to identify the broader problem raised by a particular claim and to help clients learn from past mistakes," says Connellan.

But he is not sold on the idea of having a dedicated risk management team. "It's a specialist field, and not necessarily a legal one," he says. "The work does require a legal framework, but that doesn't necessarily mean that lawyers are the people who should be involved in its design and implementation."

Nonetheless, Connellan does see risk management in a positive light: "It's a serious science and, ironically, it's one of the reasons why claims have dropped off," he says. "For example, you might have a shopping centre that has looked at the risk associated with slip and fall claims, and has managed to minimise these as a result."

With all this talk of diversification, it is important not to overlook the importance of specialisation. It is a point made by Andrew Moore, who says that clients are increasingly seeking 'true specialists' to assist with their work. "For example, a true specialist in financial planning claims who has dealt with these kinds of matters many times before is well equipped to advise on the likely outcome of a claim and to manage it proactively," he says. "It's definitely part of our firm strategy to encourage those kinds of niche specialists." Wotton + Kearney is not planning any mergers or significant repositioning of the practice. "We think we are doing reasonably well with our current approach, and we're not wanting to change that," says Moore. "Although, of course, we're always looking to identify new and better ways to service our clients."

Split and grow

The insurance legal sector has seen some well-publicised breakaways as full-service firms either shed their insurance practices or insurance partners depart pre-emptively to start their own boutique operations. The story behind the breakaway of the insurance arm of Thomson Playford, for example, to form a new firm trading under the name Gilchrist Connell, has been well documented and the factors behind the split are not new. It's the internal tension associated with insurance lawyers having lower charge-out rates than their commercial counterparts and the lower overhead costs of a smaller firm. "There are fewer marketing costs in a smaller insurance firm because it's a contact-based industry," says Wood. "It's more about the relationship than the brand." All Thomson Playford's insurance clients made the switch across to Gilchrist Connell when the split occurred, with Thomson Playford's consent.

By contrast, Colin Biggers & Paisley is one full-service firm in which the insurance practice has continued to thrive; the firm recently won the ALB Australasian Law Awards category of insurance firm of the year. "In a mid-size firm, the insurance/commercial tension is not so much of an issue because the hourly rates are more competitive across the board," says Skehan. "However, I agree that the big firms are always going to have that tension."  

Meanwhile, other insurance firms have been in expansion mode. Moray & Agnew, for one, is noted for its rapid growth from its Sydney base to establishing a network of operations in Brisbane, Melbourne, Newcastle and Canberra. This culminated most recently with the acquisition of a team of five from Hunt & Hunt, but Connellan says that the firm does not have any other major acquisitions planned. "If an opportunity arises, we'll certainly take a look, but our main focus is on consolidating the growth we've had over the past few years," he says.

This is a stability which is expected across the industry, with the larger insurers such as Suncorp, QBE and Allianz all 'mid-panel' and not due to renew their commitments for some time. "There may be some fallout come renewal time, if some of the existing firms miss out," says Connellan.

Regulatory change in the air

There is still plenty of insurance legislation in the pipeline, with a diverse array of objectives ranging from introducing an obligation for insurers to act in good faith to regulation of insurers offshore. Wood says it is, indeed, possible that the changes might increase the amount of compliance work flowing through to firms, but he is lukewarm as to the possibility of the changes otherwise generating more of it. "It might very well change how it is done, but probably not the volume of the work itself."

Geoff Connellan has a different view of the changes and says that the ones for offshore insurers are particularly important. "It has the potential to expand the business of Australian insurers. At the moment, we've got a tendency for exotic risks - like bloodstock - to be placed offshore. We might end up seeing that work coming back to Australian insurers, who will in turn need specialist legal services."

Wood also says he has seen a shift in the outcomes flowing from the courts. "We've seen some very large awards recently, and also awards under heads we've not seen much of before - for example, voluntary services and future paid domestic services."

Again, this is something that is not going to affect the firm's workflow in one direction or another, but Wood says it has certainly made the firm more cautious in its estimates. ALB

Deal activity in the insurance sector 2007-2008