"A merger of two insurers can represent a significant threat if you are not on the panel of one and there is some sort of rationalisation linked to the merger activity," explains Clyde & Co's head of insurance Simon Konsta [pictured].

It may well be a statement of the obvious and one which applies to mergers in any sector but rarely will it have been felt as keenly in the insurance sector as over the last year.

For the insurance market 2015 was a year of consolidation. With a host of mega mergers reshaping the industry including those between Ace and Chubb, Willis and Towers Watson, and XL and Catlin, consolidation of legal advisers is the inevitable conclusion – heaping more pressure on law firms already facing numerous external threats.

This section of the legal industry is already dealing with the ramifications of already confirmed legislative changes such as the Jackson reform of litigation funding ushered in through the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), the Insurance Act 2015 and Solvency II. Add in Chancellor George Osborne's November call to end minor personal injury claims like whiplash once and for all and you have what could amount – for some firms in the sector – to unprecedented challenges.

Against this backdrop Parabis collapsed into administration at the end of last year, while the world's first listed law firm – Australia's Slater and Gordon – is in crisis talks with its banks after announcing a global A$958.3m (£493m) after-tax loss and a massive write-down relating to its acquisition of Quindell's UK professional services division.

But are these firms a sign of what is to come for the sector or unique exceptions? And assuming the former, how will other firms in the sector need to adapt to survive. We speak to partners at some leading UK insurance firms to find out.

Market consolidation

While firms focusing on the sector may be battling it out to secure and retain spots on leading insurers' panels, they are unlikely to ever get a look in on any of the sector's plentiful M&A activity.

Mega deals remain very much the preserve of the Wall Street elite and the magic circle. Sullivan & Cromwell and Wachtell Lipton Rosen & Katz acted on the Ace/Chubb deal, Slaughter and May advised RSA Insurance on its attempt to take over Zurich and Weil Gotshal & Manges and Gibson Dunn & Crutcher took the lead on the Towers Watson and Willis merger.

The ripple effects of these deals though are making themselves felt throughout the wider pool of advisory firms.

The large insurers' increasing reliance on panels means that firms live and die by their panel appointments; so any large mergers of clients are inevitably a cause for concern. Little wonder then that there has already been a significant amount of consolidation among law firms active in the sector as they buy-in business. Deals at the upper end of the legal market over the last five years include the merger between Clydes and legacy Barlow Lyde & Gilbert, numerous bolt-ons for DWF and the DAC Beachcroft union.

There will be some insurers that will have had their fingers burnt by the collapse of Parabis

Former DWF corporate partner Richard Britain, now head of transactional risk at Chubb, says consolidation among clients is inevitably leading to increased competition for panel spots, "because there are potentially fewer clients and clients are becoming more sophisticated".

The recent demise of Parabis is an extreme example of what can happen when key clients move substantial amounts of work to another firm. According to the administrators' report into the group's collapse, two large insurers moved work away from the group to other providers.

This "led to talented fee earners leaving the group and a reduced ability to cover the costs of maintaining infrastructure, which did not reduce following the client losses" – a key contributing factor in the firm's downward spiral according to the report.

Race to the bottom?

In such a competitive market fee pressure is inevitable. The increasing use of technology and of growing numbers of non-lawyers has contributed to a decline in fees as insurance companies try to cut costs.

Keoghs' director of strategy Don Clarke comments: "Insurers are in a position where they have to be very tight on their expenses which has an impact on their suppliers in terms of pricing."

This can be seen in the raft of job cuts among major insurers last year, with companies such as Willis, Ageas, Aviva and AXA all cutting jobs or relocating them to cheaper locations.

But while firms have been following the cues of their client in their attempts to secure work for ever lower prices, some optimistically claim that the race to the bottom on fees is now over.

"There may be a market correction or recognition by insurers that there is more in the value equation than simply price," says DAC Beachcroft managing partner David Pollitt, [pictured right]. "There will be some insurers that will have had their fingers burnt by the collapse of Parabis."

Clyde & Co partner Chris Murray adds: "Insurers are saying they don't want to keep squeezing rates, they want long term strategic partnerships with people."

Mike Brown, Manchester senior partner at BLM, also sounds a positive note: "We are actually getting some fee increases. I think some insurance customers are saying if we want to get the best blend of skills and technology we need to be able to pay for the law firms who do it properly."

Over at RPC, the firm's head of insurance, James Miller, suggests there is now a two-speed market, with lower value claims done on fixed fees, while bigger pieces of work can attract a decent rate. For firms targeting the bigger work then there is less risk according to Miller.

"On claims where the level of damages is sub £6,000-£7,000 there is a requirement for that to be done on fixed fee, but for bigger claims, although I am not whacking fees up, nor am I under massive pressure," he says.

Some large insurance firms, such as Clyde & Co and Kennedys, have reacted to clients' desire to keep costs low by reducing the amount of volume work they take on and handling lower value claims as efficiently as possible in order to focus on securing more lucrative mandates.

"The irony of our role is we are not only looking to resolve the cases but also to eliminate leakage to help insurers reduce the amount of work they send us," Murray says.

Kennedys' insurance head Nick Williams explains. "In the volume liability area our focus is on trying to help our clients need us less and use us less. We work on the basis that if we make ourselves attractive to our clients we will get an overall bigger market share."

DAC Beachcroft meanwhile has set up a separate business to house its volume claims business in order to offer an end-to-end service at a manageable price.

2015 was the year that cyber came of age, real claims came through in substantial number and size

 New avenues

The increasing commoditisation of many aspects of insurance work and the drying up of disputes in areas such as reinsurance is also driving firms to diversify their practices.

BLM's Brown says: "We have broadened the base of the work that we do for the insurance industry, we are doing more work in the healthcare sector, we are doing more in the public sector, we are doing more in the commercial world, more work for brokers and we are doing more work of an insurance and risk nature which doesn't have an injury aspect to it at all."

Others have targeted newer areas such as cyber in a bid to capitalise on the new threats facing corporations across the globe.

Kennedys' Williams identifies the trend saying: "2015 was the year that cyber came of age, real claims came through in substantial number and size."

Clydes senior partner James Burns agrees, noting that although the product has been around for a while it is only now that: "people are starting to buy significant amounts, previously they would have bought $5m of risk, now we are looking at towers of cover close to half a billion."

Ince & Co senior partner Jan Heuvels [pictured right] explains that his firm is targeting non-traditional players interested in investing in insurance markets: "We are now developing relationships with equity funds and with banks, it's this conflation of the traditional insurance markets and the capital markets that will drive the future of insurance," he says.

Legislation, legislation, legislation

Between the continuing effects of LASPO, which brought into effect many of the Jackson litigation reforms including bans on referral fees and an end to the recovery of after-the-event insurance premiums, and the Insurance Act 2015, which comes into effect this summer, insurers and their legal advisers have been grappling with the impact of legislative changes for years. And it only looks set to get worse with Osborne's plans to end cash compensation for minor whiplash claims – an Autumn statement announcement that sent Slater and Gordon's share price plummeting. And if these were not enough, insurers also had to become compliant with the EU directive Solvency II, which mandates levels of capital held by insurers, by January this year.

We believe the legal insurance market will continue to consolidate. Our view is that we want to be a consolidator rather than consolidated

LASPO and the potential Osborne reforms have already had a major impact on firms, with the collapse of Parabis also partially attributed to the effects of LASPO on the personal injury market.

The further reforms in the pipeline may have a more significant impact, as DWF's insurance head Paul Berry points out: "The prospect of removing general damages from whiplash claims and raising the small claims track limit to £5,000 from the Chancellor's Spending Review present an ever-changing landscape for insurers," he says.

Given the early stage of the planned reform interviewees were unable, or unwilling, to predict its impact.

Clydes' Konsta says: "Nobody is entirely sure what the reforms are going to do to the sub-£25,000 space in the UK, but it will have a profound and dramatic effect for sure."

However, the Insurance Act 2015 and Solvency II also offer greater opportunities for lawyers to support their clients, firstly by helping their businesses get into shape to comply with the legislation and secondly advising on any ensuing litigation.

Heuvels says Solvency II has generated work for Ince in various ways. These include: "helping our clients deal with the increased capital they need; moving liabilities off the balance sheet by helping them to create innovative structures to achieve that."

Consolidation

Insurance-focused firms such as Clydes and DWF have seen impressive revenue growth over the last few years, in large part due to international and domestic mergers. Revenue growth for the insurance-focused UK top 50 firms far exceeds that of the full top 50 group of law firms but, strip away those to have carried out major mergers, the difference is less dramatic (see table). Significantly, reflecting the issues in the sector, average profits per equity partner have either fallen or grown less than the rest of the UK top 50 for each of the last four years.

This trend is likely to continue according to many partners. The impact of legislative reform on the volume end of the market is likely to speed up this consolidation as weaker firms are picked off by stronger rivals for books of business. And what happens to Slater and Gordon is likely to give an indication of how the rest of the sector will be affected.

Private equity backed Keoghs was in late stage talks to acquire the majority of the Parabis group out of administration, before the administrators agreed to a management buyout, and the firm is clear in its expectations.

"We believe the legal insurance market will continue to consolidate," says Clarke adding "our view is that we want to be a consolidator rather than consolidated."