Published in insuranceNEWS April/May 2018.
As has been widely reported, insurer margins are under pressure as a result of increased competition, the availability of excess capacity, and low investment returns.
But what is less often considered is the knock-on effect on service providers such as insurance law firms. Insurers cannot absorb increased charge-out rates, and the ramifications in the legal sector have been significant with a number of longstanding law firms failing or being forced to merge in recent months.
Managing Principal at Meridian Lawyers Paul Baker says firms like his have had to adapt and look at using technology and improving operational efficiencies, given their inability to increase their lawyers’ hourly rates.
He also says law firms must be able to demonstrate how they can add value and achieve better claims outcomes for their clients. As the landscape is changing quickly, things like accurate reserving and prompt claims resolution are now the accepted norm.
Mr Baker says law firms also now need to know and understand the insurer’s business and what makes them tick in a financial sense. He says it is about expertise, and how a law firm can differentiate themselves from their competitors in order to be successful.
The number of law firms on most insurer panels has been reducing in recent times, meaning more of the work is going to fewer players. The end result is consolidation in the market, with key talent shifting to a number of successful firms that remain, including Meridian.
“We have not been able to increase rates, and neither have our competitors for some years, yet our operating expenses are increasing. As such we are experiencing our own margin compression,” Mr Baker says.
“We as a legal service provider have had to look at ways of working more efficiently and meeting the challenges of that status quo. The underlying need to use innovation and technology is heightened.
“We can’t continue in the way that law firms have traditionally operated. We have seen a number of law firms that have closed or been forced to merge in the past six months in particular. The whole landscape of law firms in the insurance space has and is changing rapidly.”
Insurers have been reducing panels as they search for increased consistency, but this has had a major impact on the companies that have missed out. Those that have succeeded however, like Meridian, have been able to grow and attract quality talent.
Meridian already had offices in Brisbane, Newcastle, Sydney and Melbourne, and recently opened in Perth.
It has added 28 new employees over the past eight weeks, taking the total to 135, with a further 15-20 additions expected over the coming months.
“One insurer panel that we are on has gone from nine firms to two,” Mr Baker says. “That is significant for those firms that missed out, but the firms that are successful have been able to recruit some pretty exceptional talent and to offer their lawyers quality legal work and a true employee value proposition.
“You had a multitude of law firms practising in the insurance space, but not anymore.
“I have not seen so much lateral movement at partner level in the last 30 years. It is unprecedented.”
Mr Baker puts Meridian’s success down to a strong investment in innovation, a will-ingness to search for efficiencies and work smarter and in being able to show how Meridian can add value.
“It is all about differentiating our offer,” he says.
Meridian has focused on collating data to benchmark performance, and invested significantly in technology and robotics.
“For one client insurer we actually load our reports and all relevant documents onto the insurer’s claims management system, so that reduces double-handling and the insurer’s cost of running claims.
“We have invested $1.7 million in technology and in automating processes over the past two years. We are introducing an accounts payable system that through robotics streamlines our system and reduces our own operating costs.
“And we are using templates to help standardise processes to ensure a consistent product and quality legal service offering to our clients.
“It’s all about law firms and other service providers making it easier for our insurer clients and that’s why we’ve been very suc-cessful in being appointed to a number of panels over the past couple of years.
“We’ve been able to demonstrate a com-mitment to the insurance industry, differentiate ourselves and show how we can work with our clients to value add to their insureds and wider market offering.
“That then means you make key appointments and improve your team, it’s a compounding effect.”
However, Mr Baker warns investing in technology and searching for efficiencies does not mean abandoning “the personal approach”.
“Individuals and their experience and technical knowledge are so critical to the legal services offering,” he says.
“Insurance has always been about relationships. The relationship piece is still quite persuasive. If you have a capable team with individuals who are well known in the market, you are still in a position to be looked on favourably.
“Firms that don’t continue to offer the personal touch will struggle to survive, in my view.
“While there are these pressures, and demand on lawyers’ time is at an all-time high, you have got to balance it.
“The challenge is using time effectively and efficiently without compromising the relationship and the quality of the legal service being provided.”
Mr Baker believes the current consolidation trend in the industry has some way to run.
But he is confident that firms which like Meridian are prepared to differentiate, adapt and innovate, have a very bright future.
“I think we will continue to see a decrease in the number of insurance law firms and we will see bigger, more specialist insurance law firm offerings in the short term,” he says.
“The call on legal advice is still there. We have been through a period of a decline in the number of claims across a number of lines of business but insurers are saying that they are now seeing an increase in claims. That in turn will lead to hardening of rates and from there we go through the cycle.
“Firms which are smart and those which are open to change will prosper.”