In December 2016 the FCA released a report setting out the results of a thematic review it conducted into general insurance intermediaries’ professional indemnity insurance. Professional indemnity insurance (“PII“) gives protection to firms and their customers in the event of professional failings by the firm. The purpose of the review was to evaluate the individual policies purchased by a sample of firms, to assess whether they complied with the requirements in the FCA Handbook (The Prudential Sourcebook for Mortgage and Home Finance Firms and Insurance Intermediaries – “MIPRU“).
Purpose and Scope of the Review
There are over 6,000 authorised general insurance (“GI“) intermediaries, from which the FCA selected an initial sample of 200 firms. The sample was mainly chosen at random, but aimed to include a wide cross-section of firms varying by size and by whether GI intermediation was their primary activity or was ancillary to their main business activity. As well as the survey of firms, the FCA met with other market participants including trade associations representing brokers, insurers and MGAs.
The FCA had noticed some isolated issues during its supervisory work, so wanted to determine the extent to which the GI intermediaries met the requirements of MIPRU.
FCA Handbook Requirements
The PII that firms had in place was assessed against the requirements set out in MIPRU 3.2, including:
- 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 appointed representatives.
- 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.
Availability of cover
The FCA found that there is a broad market for GI PII, with policies from nearly 60 providers within the sample of firms in the review. All of the policy providers were authorised in jurisdictions permitted by the MIPRU. GI intermediaries are able to buy cover for potential claims across the range of their GI business. However, the terms under which cover was available varied and were more restrictive in some instances (for example, in relation to binding authorities).
Limits of indemnity
Firms are able to buy high limits of indemnity where required. A small number of firms in the sample had policy limits exceeding £100 million. The FCA considered how far firms’ policy limits met with the minimum standards set out in MIPRU 3.2.7. One firm did not have the required minimum limit of cover for a single claim, but resolved this shortly after the review.
Maximum excess levels
The FCA considered whether the firms in the sample had a higher excess than permitted by MIPRU, and, if so, whether they held the additional capital required. Several firms had excesses greater than permitted, but only one fell short of the level of capital required to support this. When this was raised the firm reduced the excess to a compliant level.
A number of policies contained exclusion clauses which remove certain types of claim from cover. The four types of clause were: suitability of insurer, unrated insurer, non-admitted insurer and insurer insolvency.
The FCA is concerned that these exclusion clauses might reduce the scope of cover below that required for MIPRU. One such example is the following suitability of insurer exclusion clause: “Any claim arising from advice by the insured on the suitability … of any insurer with whom any insurance (including reinsurance) is placed.”
One of the core functions the GI intermediaries perform is to provide advice about the suitability of insurance companies. As a result, the FCA considered the above exclusion to be inconsistent with the MIPRU requirement for cover to be for insurance mediation. The intermediaries in question had this exclusion removed from their existing policy.
The FCA also found evidence that policy wordings were not being reviewed or updated regularly. Many policies had gaps in coverage or inaccuracies suggesting that the firms themselves had not reviewed them. For example: exclusion clauses drafted so widely that they excluded GI intermediation; lack of clarity about whether the policies provided cover for appointed representatives; and out-of-date language.
Where the FCA has seen obvious non-compliance with its rules, it has raised this with the firm in question and ensure that the issue is resolved. The FCA will also be providing feedback to firms whose policies raised concern about inaccuracy or gaps.
In addition, the FCA expects GI intermediaries who were not involved with the review to analyse their own PII policies and ensure that they meet MIPRU requirements. Insurers and MGAs providing PII should also review their products to ensure that they are consistent with the needs of those intermediaries to whom they are providing cover. This will include meeting the requirements of MIPRU.
Once the Report is published, the FCA will also meet with the relevant stakeholders in the GI industry and engage with the sector through trade bodies to discuss the findings and explain the FCA’s requirements. This will make sure that the issues emerging from the review are properly communicated and understood.