Financial ratings are obtained by insurers following assessment of their financial stability through an independent process conducted by a rating agency. While a financial rating may provide some level of comfort regarding the financial position of an insurer, rating agencies are unregulated and therefore a rating cannot necessarily be relied on as a guarantee of solvency or longevity.

How do I find out the rating of my insurer?

Qualified insurers are required to disclose their financial rating, or absence thereof, to firms when issuing quotations. This requirement was introduced in the 2011/2012 indemnity period and remains in place for the 2012/2013 and 2013/2014 indemnity periods in order to:

• Allow firms to make a more fully informed decision on their choice of insurer,
• Ensure full transparency for the profession in relation to qualified insurers meeting, or not meeting, generally accepted standards of financial strength, and
• Do so in a way that will not restrict firms’ choice of insurer.

What is a qualified insurer and who regulates them?

A qualified insurer is an insurer that:

• Holds authorisation from either the Central Bank of Ireland or the competent regulatory authority in the insurer’s home member state in the European Economic Area (EEA) to write non-life insurance, and
• Has entered into a qualified insurer’s agreement with the Society for the relevant indemnity period in a timely manner.

The Society does not have the authority to refuse to enter into a qualified insurer’s agreement with an insurer who holds the relevant authorisation set out above to write non-life insurance. Therefore, the Society is obliged to permit any insurer who meets the requirements set out above to be a qualified insurer. Insurers are not required to have a minimum financial rating or any financial rating at all in order to enter into a qualified insurer’s agreement.

The Society is not responsible for policing the financial stability of any insurer. The Society does not and is not in a position to vet, approve or regulate insurers.

Responsibility for the regulation and financial supervision of Irish authorised insurers and other EEA insurers rests with the Central Bank of Ireland and the competent regulatory authority in the EEA insurer’s home member state respectively, in accordance with the European Non-Life Insurance Directives.

What happens if a qualified insurer becomes insolvent?

In the event that a qualified insurer becomes insolvent, in accordance with regulation 14 of the Solicitors Acts 1954 to 2008 (Professional Indemnity Insurance) Regulations 2011 (SI 409 of 2011), any firm insured by the insolvent insurer will be required, within 30 working days of the insolvency, to obtain and pay for insurance with another qualified insurer in the market or with the Assigned Risks Pool (ARP) if the firm is an ARP-eligible firm. If a firm fails to obtain alternative cover within 30 working days, it will be required to cease practice.

The Insurance Compensation Fund was established under the Insurance Act 1964 (as amended) for the purpose of facilitating payments to policyholders in relation to risks in the State where an Irish or EEA-authorised non-life insurer goes into liquidation and the approval of the High Court has been obtained for such payments. Should a qualified insurer become insolvent, Irish policyholders should be able to benefit from the Insurance Compensation Fund should the need arise, subject to certain limitations.

There are various restrictions placed on the payments that can be made out of the fund, and it is important to bear these in mind when considering the protections that may be afforded to your firm and its clients in the event of an insolvency of a qualified insurer. Such restrictions include a cap on the amount due to a person under a policy, which must not exceed 65% of the amount due under the policy or €825,000, whichever is the lesser. A sum due to a commercial policyholder may not be paid out of the fund unless the sum is due in respect of a liability to an individual.

Why should I care about the financial stability of my insurer?

The financial stability of your qualified insurer may ultimately determine whether claims made against your firm will be paid. In the event of your insurer becoming unable to pay claims against your firm, the ultimate responsibility and liability to meet those claims rests with the principals of the firm. The financial stability of your insurer is therefore one of the most critical considerations in deciding where to place your insurance.

While the price of insurance is an important factor, firms are strongly advised to fully consider financial stability when choosing an insurer due to the extremely costly consequences for a firm should its insurer become insolvent. While financial ratings are not a guarantee of solvency, they do give an indication and objective measure of the financial stability of an insurer.

It is also important to note that an insurer authorised by a competent regulatory authority in an EEA member state must maintain technical reserves and a solvency in accordance with the minimum requirements set down in the directives. The Central Bank of Ireland typically requires Irish authorised insurers to maintain a solvency margin in the region of 150% to 200% of the minimum requirements set down in the directives.

It is a matter for each principal and partner in private practice to take responsibility for their own business decisions and to accept the consequences of those decisions for their firm. The choice of insurer is a vitally important decision for the firm as, in the event that the firm’s insurer becomes insolvent:

1. The firm will be required either to obtain alternative cover and pay a second premium within 30 working days of the insolvency event or alternatively to cease practice.
2. There is no guarantee that another qualified insurer will offer the firm replacement cover.
3. Firms that cannot obtain replacement cover in the market may apply to the ARP and, if accepted, will be required to pay the ARP premium in full. The ARP premium will be calculated according to the ARP premium schedule, which can be found in the PII policy documentation on the Society’s website at www.lawsociety.ie/Pages/PII/#policy. The ARP premium will usually significantly exceed normal market rates, reflecting the high level of risk attached to a firm unable to obtain cover in the market.
4. Any firm accepted by the ARP that does not pay the ARP premium in full will be deemed to be a defaulting firm under the regulations and will be required to close. If the firm does not close, the Society will apply to the High Court for an order compelling the firm to close.
5. Such firms will, therefore, require access to substantial funds at short notice to continue in practice, and
6. Claims made against the firm may not be fully covered by the Insurance Compensation Fund, with potentially significant financial consequences for the principal or partners of the firm who may be directly liable for any uncovered claims.