The Financial Conduct Authority (FCA) has published the results of a review into professional indemnity (PI) insurance held by general insurance intermediaries. The thematic review was undertaken by the FCA in order to evaluate individual policies bought by intermediaries and assess compliance against MIPRU and other FCA Handbook requirements and to consider how effectively the general insurance PI market was functioning in terms of breadth of cover and availability. In particular the FCA review has brought to light concerns about policy drafting and the impact on the effectiveness of cover.
Various requirements for PI cover for general insurance intermediaries are set out in MIPRU. These include the requirements to purchase cover from an insurer who is suitably authorised; cover must extend to the claims arising from the conduct of the firm, its employees and appointed representatives; cover must meet the limits of indemnity requirements and requirements concerning excess levels; cover should include legal defence costs and Financial Ombudsman awards and should be continuous.
What the thematic review revealed
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.
The FCA identified that due to poor drafting many policies had inadvertent gaps in coverage or contained inaccuracies. Examples given include clauses that seek to exclude investment activities but had the result of excluding any insurance intermediation. The review also revealed that there was often a lack of clarity about the extent to which appointed representatives were able to benefit from cover or awards made by the Financial Ombudsman Service. A number of policies were out of date: the wrong financial services regulators were referenced and policies included such risks as “Y2K”.
Next steps
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.
Insurers and MGAs will be expected to review their products in light of the FCA thematic review findings to ensure that they meet the need of intermediaries. They should also ensure that policies meet MIPRU requirements.
