The FCA has reviewed the Professional Indemnity Insurance (PII) policies of 200 general insurance intermediaries and compared the cover of those policies against the rule requirements detailed in the Prudential Sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU).
This thematic review is of relevance not only for intermediaries’ own policies, but also for those insurance brokers who place PII for other firms.
The review showed that there is sufficient choice within the market. Firms are able to obtain high levels of indemnity where required.
However, in a number of cases, rule breaches or significant concerns were identified:
• Firms did not have the minimum level of cover required by the rules;
• Policy excesses that were greater than permitted by the rules;
Policies that contained exclusion clauses, which gave the FCA significant concerns as their effect, could be to reduce the scope of the cover below that required by MIPRU. The four types of exclusion clause were:
• Suitability of insurer (11 policies)
• Unrated insurers (2 policies)
• Non-admitted insurers (13 policies)
• Insurer insolvency (140 policies);
PI insurers, explained that insurer insolvency exclusions are included in policies, as they do not want to underwrite the credit risk of the insurers with which the intermediary places policies. In the event of the insolvency of an insurer, they considered that policyholders should seek compensation from the Financial Services Compensation Scheme (FSCS).
A high level of inaccuracies in policies, particularly the scope of cover for Financial Ombudsman awards and for appointed representatives.
Professional indemnity insurance
Professional indemnity insurance (PII) provides important protection for firms and their customers, in the event of professional failings by the firm.
It is important that firms who require professional indemnity insurance ensure that their policy/cover complies with the requirements in the FCA Handbook (MIPRU1).
Although financial resources and appropriate systems and controls can generally mitigate operational risk, professional indemnity insurance has a role in mitigating the risks a firm faces in its day-to-day operations.
Firms carrying out GI mediation activities are required to have PII. This is to:
• Ensure that firms have adequate resources to protect themselves, and their customers, against losses arising from breaches of their duties under the regulatory system or civil law, and
• Implement the requirement of the Insurance Distribution Directive (IDD) for intermediaries to hold PII against any liability that might arise from professional negligence.
As an alternative to PII, firms are permitted to have a comparable guarantee provided by another authorised firm that has net tangible assets of more than £10 million.
The FCA carried out a review to evaluate the individual policies purchased by a sample of firms to assess whether they complied with the requirements in their Handbook (MIPRU1).
The FCA review of PI cover found:
• Availability of cover. Firms were able to obtain cover for claims arising from the range of their activities.
• Policy limits and excesses. Firms were able to obtain cover for high limits of indemnity. In a small number of cases firms did not have the minimum level of cover required by the Handbook. In some instances firms had an excess greater than permitted.
• Exclusion clauses. PI policies contained exclusions that raised “significant concerns” as their effect was to reduce cover below that permitted by MIPRU. In particular exclusions concerning suitability of insurer, unrated insurers, non-admitted insurers and insurer insolvency were of concern to the FCA.
Many policies had inadvertent gaps in coverage or inaccuracies indicating that they had not been subject to appropriate review by firms themselves, the intermediaries they used to place their cover, or by the insurers that provide products. This extended to:
• Exclusions clauses intended to exclude investment-related activities but so widely drafted that they excluded GI intermediation
• A lack of clarity about whether policies provided cover for: appointed representatives the firm might have; and for awards by the Financial Ombudsman Service (FOS).
• Out-of-date language particularly when referring to financial services regulators.
When applying for or evaluating your PI cover firms should consider the following:
The requirements for PII set out in MIPRU states the cover must include:
• The product must be purchased from an insurer with appropriate authorisation in: the EEA; a Zone A country; or the Channel Islands, Gibraltar, Bermuda or the Isle of Man.
• There must be cover for claims arising from the conduct of the firm, its employees and ARs.
• Cover must meet the minimum limits of indemnity requirements.
• Cover must meet the requirements as to the policy excess.
• There must be appropriate cover in respect of legal defence costs.
• There must be continuous cover.
• There must be cover for Ombudsman awards made against the firm.
Minimum limits of indemnity: insurance intermediary
If the firm is an insurance intermediary, then the minimum limits of indemnity per year are:
• For a single claim, €1,250,000; and
• In aggregate, the higher of:
• €1,850,000; and
• An amount equivalent to 10% of annual income (this amount being subject to a maximum of £30 million).
Maximum excess levels
For a firm, which does not hold client money or other client assets, the excess must not be more than the higher of:
• £2,500; and
• 1.5% of annual income.
Cover for FOS awards
The majority of policies contained explicit cover for financial ombudsman awards, but in some cases the sub-limit fell below the maximum award of £150,000. Other policies did not explicitly mention FOS awards, which is potential a breach of MIPRU.
The FCA is proposing that, on 1 April 2019, the ombudsman service’s £150,000 award limit should change to:
• £350,000 for complaints about acts or omissions by firms on or after 1 April 2019
• £160,000 for complaints about acts or omissions by firms before 1 April 2019, and which are referred to the ombudsman service after that date
• Complaints made before 1 April 2019 would be subject to the current £150,000 award.
The FCA also propose that, from 1 April 2020 onwards, both award limits should be automatically adjusted on 1 April to ensure they keep pace with inflation, as measured by the Consumer Prices Index (CPI).
Where the FCA has found examples of non-compliance with MIPRU firms have been contacted to ensure that corrective action is taken. Furthermore, the FCA proposes to engage with trade bodies to ensure that the issues that have been raised are fully understood. Intermediaries not included in the review will be expected to review their policies to ensure that they meet MIPRU requirements.
There is no rule or formal guidance in the FCA handbook setting out any relevant obligations on insurers, but the FCA has clearly set out within its report that it expects insurers to provide cover that is appropriate. Insurers may therefore wish to review their policies to consider whether the cover provided meets the requirements set out in MIPRU 3.2.