Product overview: Legal expenses

These member perks were formalised in 1917, when the first legal protection insurance policy was launched by La Defense Automobile et Sportive in France. This offered motorists legal services and coverage of expenses for legal prosecution. 

Birth of the UK market
Take-up spread across Europe over the following years as travel increased but it wasn’t until the 1970s when legal expenses insurance came to the UK as David Swigciski, director of client services at Das, explains: “The Criminal Law Act 1967 repealed a law that, until then, had prevented anyone from providing support for legal proceedings that they weren’t involved in. We were one of the early pioneers in the UK, coming into the market in 1975.”

By that point, the product had expanded beyond its motoring roots, with cover available to protect a wide range of legal rights including private individuals, companies, charities and landlords.

A further leap forward in product development came in the early 1980s, with the addition of legal helplines. These are now a standard part of most policies and, according to Karen Beales, managing director of Financial and Legal Insurance, and a valued part of the cover. “We’ve had a lot of success stories stemming from the legal advice offered alone, even if there is no claim to be made under the policy.”

Market statistics
Its French roots means legal protection insurance is well established in Europe, with that region accounting for around 80% of the global market. UK data is inherently difficult to obtain but Beales says premium income is believed to be almost £500m, with around 25 million policies in force.

This is in line with the views of Jared Drucker, commercial manager at Coplus. “The BTE Legal Expense Insurance 2019: Consumer Research Report shows that half of motor insurance customers have legal expenses insurance,” he says. “This mirrors our own experience: some insurers give it away alongside the main motor policy but, where it’s sold as an option, there’s normally a 30% take-up, depending on the make-up of the book.”  

The UK market is dominated by a small number of specialist insurers offering cover to a range of other insurers, MGAs and insurance brokers. Innovation remains essential to ensure that products suit customer needs, changing legislation and regulatory pressures. As examples, Drucker says that levels of indemnity on motor products have typically increased from £50,000 to £100,000 over the years, with additions such as motor prosecution and contract disputes added to support policyholders.

The way claims are managed has also evolved, with Swigciski pointing to the establishment of legal panels as an example of how insurers have provided greater control over customer experience and claims cost management. “Insurers are pushing this further, introducing more legal risk management, unlimited legal advice and enhanced digital services to help protect customers against future legal disputes and to settle more claims without the need to go to court.”

Rates and competition
Rates are increasing across most parts of the legal expenses market, albeit at different speeds. For example, while retail rates are yet to increase and there’s plenty of capacity, Beales says there is now less choice available for larger commercial risks, with a smaller number of specialist insurers offering products.

The effects of the hardening market may be about to hit the retail market, with Drucker saying that underwriting rates on motor legal expenses are now higher.

“Policies are paying out to cover the cost of helping claimants with small track cases,” he explains. Other factors are also fuelling the hardening market. These include the impact of the pandemic on claims performance and increasing claims costs, which have been exacerbated by delays in court hearings. Swigciski adds: “There is strong capacity in the market but it’s also a complex and highly competitive segment so margins for carriers are very tight. This has seen some of the legal expenses MGAs change or diversify their capacity providers in the last couple of years.”  

Whiplash reforms
With policies supporting claimants with small track cases, there are already signs that the Civil Liability Act, which came into effect in May 2021, is affecting the legal expenses insurance market. Beales says it’s still too early to establish the full effect of the reforms but she expects it will lead to increases in premiums.

“A greater percentage of road traffic accident claims will fall within the small claims court remit meaning that fewer will be covered by policies where this type of case is excluded,” she explains. “Further, solicitors that would previously recover their costs from the other side will now be seeking recovery from the policyholder’s legal expenses insurance. Premiums are likely to increase to cover this risk.”

Although they’re likely to mean higher premiums, many see the reforms as positive for the legal expenses insurance market. Drucker says that with around 80% of claims now falling into the small claims track, there’s a stronger imperative for brokers and insurers to protect customers. “Without cover before the event, their choices for assistance with a small claims case is more limited and costly,” he says.

“Unfortunately, the lack of public awareness means it may take time before this is understood, and the need for cover translates into sales.” 

Future outlook
Raising awareness of the need for cover is certainly something that is on the legal expenses insurance market’s agenda, especially as the risk of a legal dispute is on the increase. Swigciski says that one of the obstacles is that the product is often sold as an add-on in an extremely competitive market, making it difficult to communicate its value.

Product innovation may help raise its profile too, with the market speculating about a variety of different design options. These include bringing personal accident and legal expenses together; extending cover to cyber risks and disputes; and adding in rehabilitation services to support policyholders.

Additionally, regulatory guidance may help, as Beales explains: “The FCA’s product value reviews will almost certainly help to identify more clearly the true value of the legal expenses insurance product.”