AFTER THE EVENT INSURANCE
In the UK, the principle of “the loser pays” on commercial litigation disputes is firmly entrenched. In other words, a claimant will typically be ordered to pay the defendant’s cost in case of an unsuccessful outcome. In the industry, this is often referred to as Adverse Costs risks.
After-the-Event (ATE) Insurance is provided by some insurers who cover the risk of Adverse Costs for meritorious claims. This means claimants who lose a meritorious claim carry no further financial liability risk.
HOW DOES IT TYPICALLY WORK?
Claimants who successfully secure ATE Insurance do so because the insurer shares the view that the claim is meritorious – in other words, it has good prospects of success of over 60%.
The insurer will therefore charge a premium to cover the claimant upto a maximum agreed amount – the Limit of Indemnity (LOI) – to cover any Adverse Costs (and in some cases own disbursement costs incurred). However, two features about ATE insurance policies stand out from other general insurance policies.
1) The premium may be deferred, meaning that the premium is only payable upon the conclusion of the insured claim; and
2) The premium itself is insured by the policy, meaning that if the claim is lost, then the premium itself is also recovered.
Therefore, in the scenario that the claimant wins his claim, the ATE insurance premium becomes payable. But if the case is lost, the claimant is not required to pay the premium and the Adverse Costs (and disbursements costs if applicable) are paid by the ATE insurance.
ATE INSURANCE AND THE REGULATORY FRAMEWORK
ATE Insurance is an insurance product and is therefore regulated by the Financial Conduct Authority in the UK and other regulatory bodies globally.
While the SRA do not have any regulation over the broader legal expenses insurance market, solicitors in England and Wales are obliged to make their clients aware of the availability of After-the-Event Insurance. This is set out in the Solicitor’s Regulation Authority Code of Conduct.
INSURER’S CREDITWORTHINESS: RATINGS AND SOLVENCY II
Ratings and Solvency II both provide a useful gauge of the credit worthiness of an ATE insurer.
Rating agencies, such as Standard and Poor’s and AM Best, specialise in assessing the credit worthiness of not just insurers but sovereign countries, other financial institutions, corporates and structured financial instruments. The rating is arrived at from a qualitative and quantitative analysis assessing the probability of an insurer defaulting. As such, it is a reflection of their analysis. Ratings are not compulsory – there is a cost to secure a rating from a rating agency, which explains why many entities do not seek a rating. However, ratings are a very useful and widely used marker for the credit worthiness of an insurer.
Solvency II is a regulatory framework set out as a formal Directive in European Union law, using actuarial methodologies to outline the capital requirements of EU insurance companies to reduce the risk of insolvency. As such, there is significant overlap behind the analysis of credit ratings and Solvency II metrics. However, unlike credit ratings, Solvency II is not a choice – it is compulsory for all insurers to be Solvency II compliant and failure to do so can result in the regulator ordering the closure of an insurer, typically by way of orderly run-off. In that regards, Solvency II is a key factor in how insurance companies manage their business as it is the metric that regulators constantly monitor.
SPARKLE POSITION OF ATE INSURERS
Sparkle requires all insurers to be Solvency II compliant and to be notified of any reason that they may have informed their regulator that its Solvency II may be breached in the near future.