Insurers plan investment in legal arms to cut external spend

A number of big insurance companies are planning to ramp up their internal legal teams and set up their own law firms in moves that are likely to reshape the legal insurance market, according to new research from Espirito Santo Investment Bank.

The research, referenced in The Times earlier this week (13 August), found that half of insurers consulted by the bank plan to build their own enlarged teams to handle disputes instead of handing work to external law firms in an attempt to cut costs.

Others plan to use changes ushered in with the Legal Services Act (LSA), which allows external investment of law firms and for businesses from other sectors to offer legal services, to set up law firms. Investment in law firms handling insurance claims could also be a possibility.

The bank’s research found other measures to cut legal spend being considered by insurers included scrapping legal panels and instead sending all of the work to a single low-cost provider at fixed prices.

Litigation relating to personal injury, product liability and professional negligence are understood to be three of the key areas insurers hope to run themselves.

If the findings prove true it is likely to result in a number of insurance law firms being pushed out of the market according to the bank, as well as driving further mergers, such as the tie-up between Clyde & Co and legacy Barlow Lyde & Gilbert in November 2011.

The insurance industry currently accounts for around £5bn a year worth of fees for UK lawyers, with a large portion consisting of personal injury claims.

Commenting on the findings the managing partner of one City insurance firm said: “The problem many insurers are facing is the massive number of personal injury claims and so an attempt to bring some of this in-house or look for other ways of managing it would make sense. I think the North-West firms that do a lot of this work are likely to be most affected.

“I think even though there is a spread of volume insurance City firms it is unlikely to have as much of an impact here, at least in the short to medium term, because it would take such a long time to build up the specialist capability.”

The research comes after Australia’s Slater & Gordon’s, the world’s first publicly listed law firm, bought UK personal injury specialist law firm Russell Jones & Walker earlier this year for £53.8m in a Legal Services Act first.

The move demonstrated the appetite for further consolidation as well as an indication of how insurance firms plan to take advantage of the new opportunities afforded them under the LSA.