Research Trends & Conclusions: Insurance & Reinsurance 2011
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.
These are testing times for the insurance industry. Premium rates have been driven down over the past three years by heightened competition in the insurance market and falling loyalty among policyholders. The number of natural catastrophes meant that 2010 was the sixth most loss-intensive year for the insurance industry since 1980. Overall losses were US$130 billion, of which US$37 billion was insured. Among the most severe were the earthquakes in Haiti, Chile and central China, as well as the heat wave in Russia and floods in Pakistan. Over 300,000 died as a result. These catastrophes have continued into 2011, with flood damage in Australia and the earthquakes in New Zealand and Japan – and the latter’s subsequent tsunami and nuclear reactor crisis – in addition to tornadoes in the US. Estimates of the cost of these disasters to the insurance industry run as high as US$50 billion, and the North American hurricane season has yet to come. Given that last year analysts predicted that a natural catastrophe would need to cause an insured loss of over US$40 billion to lift prices across the industry, an end to the soft market is anticipated as premiums increase to restore the capital ratios of insurers.
Clients have also had to focus their attention on the activity of more proactive regulators following the financial crisis. Solvency II will significantly affect the way insurers do business and has triggered much of the advisory work for insurance and reinsurance lawyers. These developments and their affect on the industry have caused a shift in the types of insurance specialists identified in this publication as the most highly regarded lawyers in the world.
Litigation
For this article, we have collated the evidence gathered from thousands of votes and interviews with lawyers and corporate counsel specialists since 2008. In doing so, we have identified the 50 most highly nominated individuals in each edition. We then calculated the proportion of lawyers in the top 50 bracket for each publication specialising in the contentious, regulatory and transactional fields of insurance work. Shifts in specialisation are a sign of a change in voting patterns in the research which in turn reflect trends in the market overall.
The number of litigators in the top 50 bracket increased by 12 per cent in the 2010 edition. This was a result of the number of transactional and regulatory specialists falling and the fact that contentious lawyers were kept busy by the uptick in the professional lines market.
While the number of litigators in this publication compared to regulatory and transactional lawyers remains significantly larger, in 2011 there has been a notable reduction in insurance litigators in the 50 most highly nominated insurance practitioners.
It has been widely agreed among interviewees that insurance and reinsurance litigation has continued to contract. One contributor went as far as stating that “this area has turned into a desert for lawyers”, and some are choosing to diversify their practice. Companies are being more protective of their relationships, which they are keen to maintain in a highly competitive market, and are settling more often. Smaller legal budgets are limiting the number of cases going to court and it appears that insurers are not convinced of the effectiveness of litigation because a case can go either way in court. One source noted that “clients want to stand a better chance of defining the terms of their own win or loss”. Nevertheless, arbitration has remained unattractive to insurers as arbitration awards have been challenged in court. Consequently, for the time being it seems, companies are favouring mediation or are settling early as this provides them with the ability to have greater control over the result of a dispute.
Despite this, directors and officers insurance, in addition to errors and omissions issues continue to be an active area for litigators. This has been a consequence of the financial crisis as plaintiffs are seeking to right the wrongs that are perceived to have contributed to the recession. Interviewees also noted that investment products are a significant source of litigation. The British Bankers Association recently lost a court challenge against new rules on the mis-selling of payment protection insurance. In light of this, Lloyds Banking group has made a £3.2 billion provision for possible claims. Many expect insurance litigation to begin to see an increase in 2011 as underwriting standards that are perceived to have fallen in a soft market are revealed and problems begin to arise. The volume of claims brought as a result of the number and scale of natural disasters in 2010 and 2011 is also likely to cause a rise in litigation in the near future.
The lawyers in this publication who have been able to maintain their litigation practice due to the quality of their counsel have found that they are still being referred very complex and high-value cases. This is because clients are still willing to go to court for cases of significant consequence. There were mixed views among contributors relating to which firms clients are favouring for this kind of litigation. Some argue there has been a polarisation in the type of work with clients referring high value cases to magic circle firms, while others suggest that in the current climate clients are realising the importance of referring high-value cases to firms with a specialisation in insurance litigation that can compete on price. However, what is certain is the legal market for complex insurance litigation is highly competitive, especially as lawyers are now vying over a smaller pool of work.
This has meant international firms that have a broad and successful practice across the contentious, regulatory and transactional areas have been able to compensate for a lack of contentious work as they have managed to focus on other areas of specialisation. Those firms that rely more heavily on contentious matters have had less room for manoeuvre and have suffered as a result.
Growth of transactional and regulatory practice areas
The results of the research indicate that between 2008 and 2010 the number of regulatory lawyers in the top 50 bracket fell by 30 per cent while the number of transactional lawyers fell by 14 per cent. This can be explained as a direct consequence of the financial crisis, as legal budgets tightened, and a lack of M&A activity followed in most industries. Nevertheless, 2011 represents a shift back towards regulatory and transactional work. The latter field has seen a 133 per cent increase from 2010 in the 50 most highly nominated individuals in the research.
Increased regulation of the global insurance industry has sparked an increase in demand for both regulatory and transactional lawyers as clients prepare for imminent changes to industry requirements. Following the financial crisis and the government bailouts that ensued, the issue that has dominated clients’ concerns in the insurance regulation space is the impact of Solvency II and the Dodd-Frank Act. At the time of writing tighter regulation under the Dodd-Frank provisions and their exact implications for the industry have yet to be confirmed. Nevertheless, Solvency II has already cost Lloyd’s of London £300 million in preparation for the new rules, which come into effect in January 2013. These require insurers to carry more capital to help guarantee that the industry will continue to be able to cover any major losses. This will have a considerable affect on insurer’s lines of business and has resulted in a significant number of transactions as the industry sees some consolidation and restructurings. Insurers have found that the additional capital that has been required will dilute their returns for certain lines of business. Equally, others may be seen to be profitable in the Solvency II era. The industry is seeing increased interest in M&A as a soft market provides investment opportunities for strategic buyers, particularly as there is an end in sight for low premium rates. Senior individuals interviewed during the course of the research noted that more lawyers are entering into this field.
Many interviewees noted that the kind of consolidation expected in the market has not yet come to pass. Some put this down to the focus of insurers on the scope of regulation that has or may be enforced and the implications for their international operations. Management is spending less time looking at opportunities as a result.
This has been coupled with widespread recognition that regulatory agencies around the world are taking an “intensive” approach following the financial crisis. Prior to the crisis, mainly extreme cases were picked up by regulators. However, clients now feel that they face an increasingly proactive regulator that is ready to capture the full extent of alleged problems attributed to insurers. Contributors also noted the large cost of investigations; in some cases the costs incurred by clients have been larger in comparison to the expenditure of compensation. Regulatory lawyers in the US also report an increasing volume of work as a result of President Obama’s health care reforms.
Country analysis
Through in-depth research and analysis conducted around the globe, nine individuals in seven new countries have been identified in this publication as leading insurance specialists. Chile and Peru stand out with two individuals featured each. As in other emerging markets lawyers are benefiting from a growing middle-class that is steadily increasing the demand for insurance services. The devestating earthquake in Chile in February 2010 also meant that the services of insurance lawyers with excellent local expertise was required. Other jurisdictions, notably Russia, New Zealand and Latvia show a rise in the legal expertise of lawyers active in this area.
The legal market continues to expand into new jurisdictions and the emerging markets have received much attention. Micro insurance is estimated to be worth US$40 billion of new premium business in Asia, Latin America and Africa. A niche market is also opening up for populations in Islamic countries, known as Takaful insurance. The potential benefits that exist in these regions means that there is much to gain for clients entering into new markets, and the legal industry is expanding to match the increasing demand for global expertise.
The table opposite identifies some of the countries that are increasingly attractive to international law firms, and that are developing leading lawyers of their own. China, Malaysia and India did not feature in this publication in 2006 and now have a considerable number of specialist counsel as they have continued to de-regulate and privatise their economies. China and Malaysia still have a relatively small number of individuals featured in the following pages, yet their number is set to increase over the coming editions due to the opportunity their countries can provide to investors and the level of insurance work this will create. While 2008 saw a reduction in individuals selected in Hong Kong, which was primarily a result of the closure of CMS Cameron McKenna’s Hong Kong office in 2007, the insurance market there has shown steady growth. Singapore and South Africa are the most active and developed legal markets for insurance work and their rising contingent in this publication is proof that insurers are increasingly looking to gain a stronghold in new markets that offer promising rates of return.
The table above provides an insight into the firms that have performed particularly well in the research since 2006. Those mid-tier firms that have established a reputation for themselves in the contentious and regulatory areas have done well as they have been able to diversify their practice as contentious work has fallen. Clyde & Co has more than doubled its representation between 2006 and 2011. Dewey & LeBoeuf is also well-respected for its expertise in these areas and has maintained a consistent number of nominees.
Clifford Chance has steadily increased its contingent in the publication after two partners left the litigation team which was refected in the research results in 2008. The firm has benefited from the increase in insurance-related transactional and restructuring work and its strong position in the corporate sector. For a number of years Hogan Lovells’ representation in this publication, and those of its predecessor firms, was the largest overall. This year its contingent has fallen slightly as Lovells closed its Chicago office in October 2010, which meant that a number of litigators from the office left the firm. This has been more a reflection of the difficulty insurance litigators have faced than of the firm itself; contributors continue to note the outstanding counsel the firm provides to clients in the insurance industry. DLA Piper has also steadily increased its representation in this publication.
Fighting to deliver value
There has been widespread recognition among interviewees that clients have become far more proactive over the past few years. Corporate counsel are more aware than ever of the type of service and fee that can be expected from particular firms. Lawyers are keen to show that they are working hard to drive down their costs and streamline their operations in order to provide a superb service at a reasonable cost to the client, who expects their external counsel to know their company inside-out. They are also less willing to pay for paralegals and junor associates and firms in some cases are responding by outsourcing their work. This can often be difficult for firms advising on large disputes where millions of gigabytes worth of information are provided. Some firms are working with external specialist insurance technicians to analyse large quantities of data. Other firms are providing in-house seminars free of charge regarding novel industry issues as part of their service. Lawyers are no longer able to rely solely on their reputation, this must be followed up by outstanding counsel and competitive fees. Those lawyers that have proven their exceptional talent to clients, and have satisfied demands relating to their own efficiency and competitiveness have been carefully selected for inclusion in this publication.