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Summary of Regulator Assessment: Qualifying Regulatory Provisions

Title of Proposal

Thematic review of general insurance intermediaries' professional indemnity insurance

Lead Regulator

Financial Conduct Authority (FCA)

Date of Assessment

5 December 2016

Commencement Date

January 2016

Origin

Domestic

Scope

The assessment covers the whole of the UK and focuses on general insurance intermediaries, including insurers and managing general agents (MGAs). It does not include the implementation of a Cutting Red Tape review.

Core Content

The thematic review aimed to evaluate the compliance of 186 general insurance intermediaries with the existing professional indemnity insurance (PII) requirements in the FCA Handbook (MIPRU 3). A secondary goal was to assess the functioning of the GI PII market.

The review identified three areas where it provided clarification on existing rules:

1. Minimum policy limits
2. Financial sub-limits for FOS awards
3. "Suitability of Insurer" exclusion

These clarifications were intended to ensure that PII policies meet the regulatory expectations and function effectively within the market.

Impact to Business

Cost Estimates

The cost estimates are based on an assumed rate of £48/hour for compliance staff, derived from the Robert Half salary guide (2016), which estimates compliance managers in London earn between £70,000 and £104,000 annually.

1. Familiarisation Costs

• Intermediaries: 5,209 firms
  • Estimated time per firm: 2 hours
  • Total cost: 5,209 × £96 = £500,000
• Product Providers (Insurers and MGAs): 40 firms
  • Estimated time per firm: 10 hours
  • Total cost: 40 × £480 = £19,000
• Total Familiarisation Costs: £519,000

2. Reprinting Costs

• Firms affected: 18 firms (those with the "Suitability of Insurer" exclusion or inappropriate FOS sub-limits)
• Estimated cost per firm: £2,000
• Total reprinting costs: £36,000

3. Total One-Off Costs

• Familiarisation costs: £519,000
• Reprinting costs: £36,000
• Total one-off cost: £555,000

Remediation Costs

The review did not require any immediate remediation beyond the three identified areas. However, it did highlight the need for firms to adjust their PII policies in specific instances.

1. Minimum Policy Limits

• Issue: MIPRU 3.2.7 (2) was interpreted by some firms as requiring cover based on revenue rather than PII limits.
• Findings: 3 out of 5 firms with over £100m revenue had inadequate PII cover.
• Remediation: These firms increased their PII cover beyond the minimum required.
• Estimated average additional premium: £11.6k per firm
• Total estimated ongoing cost: £93,000 per year (assuming 8 firms with similar issues)

2. Financial Sub-Limits for FOS Awards

• Issue: Some policies had financial sub-limits that could limit FOS cover.
• Findings: 31 policies had sub-limits (e.g., £100k per claim or £150k aggregate).
• Conclusion: These sub-limits were not compliant with MIPRU requirements.
• Assumption: Firms would not need to pay additional premiums to adjust sub-limits to compliant levels.

3. "Suitability of Insurer" Exclusion

• Issue: This exclusion was found to be not permissible under MIPRU.
• Findings: 12 firms had this exclusion in their policies.
• Remediation: These firms were required to remove the exclusion.
• Cost: £0 (no additional premium was charged by PII insurers for removal)

Additional Information for BIT Score Validation

• The BIT score is calculated as the net cost to business for five years.
• The £555,000 one-off cost is based on the assumption that the changes would be implemented by experienced compliance staff.
• The £519,000 familiarisation cost includes both reading the report and comparing it to internal policies.
• The £36,000 reprinting cost is based on a sample of 18 firms needing to update their policy documentation.

Conclusion

The thematic review focused on clarifying and ensuring compliance with PII requirements for general insurance intermediaries. It identified three key areas requiring attention and estimated the total one-off cost at £555,000. While some firms incurred costs to increase their PII cover, the majority of the changes did not result in additional premiums. The BIT score reflects the net cost to business over five years, incorporating familiarisation and documentation costs.