In the UK and in Europe generally, the conventional market and the insurance brokers are less conversant with the concept of ‘self-insurance’, and less obliged to seek that route. Thus other criteria for mutual insurance success can be examined, namely the ability to launch the mutual or association captive, without upsetting the conventional insurers or the brokers. A typical approach in the difficult market of professional indemnity insurance, for example, might be as follows:

1 To exert influence against current market trends to narrow cover by imposing aggregate limits and excluding broader elements of cover currently available.

2 To improve negligence defence techniques by involvement in ‘underwriting’and ‘risk bearing’ (with profit potential) – pre- and post-loss.

3 To become involved in claims settlement.

4 To ‘capture’any excess profits that might be made by the conventional insurance market.

5 To provide a smoothing mechanism to even out the peaks and troughs of the traditional insurance trade cycle.

A purely funding approach may be made that relies on actuarial projections, and does not seek any support from the conventional insurance industry. Such an approach would be based on a company limited by guarantee and the fund would be structured so as not to constitute an insurance contract requiring statutory approval.

The mechanics of such an approach are demonstrated by the first proposals of the Law Society, in the Law Society’s Gazette, and Bacon and Woodrow Consulting Actuaries, who made the projections. These proposals were made possible by the following special features (European Commission 1989).

1 Under the Solicitors Act 1974, lawyers can establish a fund and grant statutory indemnity to solicitors, employees, etc. (past and present) and oblige solicitors to make contributions to the fund. Thus obligations to make payments into the fund and rights to recover from that fund are established without any contract of insurance ever being in force.

2 Claimants against a solicitor would have statutory rights (under the Solicitors Act) to be compensated by the fund for any claim sustainable against a solicitor. To give the Council some idea of the financial consequences of self-insurance, a limited number of products are set out below . When considering them a number of facts must be borne in mind, namely that:

   - actuaries have assumed that the Department of Trade and Industry would not demand that the fund meet the EU solvency margin. Even if it is desired that the fund should be able to operate within the EU solvency margin in the longer term, that margin could be built up over a number of years and, moreover, any incidental losses could be recovered over a period;

  - the projections take into account a 15 per cent year-on-year increase in premiums and claims settlement. The figures take into account increases in the size of the number of claims and the amount of claims, which tend to run ahead of the general level of inflation in the economy;

   - tax is allowed at a rate of 35 per cent and interest at 10 per cent shown at a net rate of 6.5 per cent;

   - reserves are discounted to a figure which, including the additional interest credited thereto, would amount to the sum necessary on settlement, at the projected time that the settlement would be made;

   - claims incurred are claims reserved;

   - management expenses are the costs of setting up the venture. Costs of defence are included in the claims and claims reserve figures. Costs of underwriting, claims handling, etc. would be met, from a sum equal to current brokerage;

   - the total net investment income is split between net discounted reserves and the profit and loss account;

   - the results of each projection can most readily be seen from the balance sheet. The liabilities are made up as follows:

          i. insurance funds – the total of discounted reserves carried forward for prior years and the current year;

          ii. accumulated profits – the profit carried each year to the profit and loss account accumulated to the end of the balance sheet year;

          iii. total liabilities – the sum of insurance funds and accumulated profits.

Under total liabilities is shown the solvency of the fund. The minimum EU solvency margin is compared with the net assets available to cover that margin, where ‘net assets’are equal to ‘accumulated profits’, since no capital contribution is required.

The Law Society Council has approved the Solicitors Indemnity Rules 1987, which will bring into effect a statutory fund providing the same indemnity as was previously given by the master policies, placed earlier in the insurance market.