Feedback and Final Consultation on Professional Indemnity Insurance for Insurance Intermediaries and Insurance Managers (2022-06-10)

Summary

This is a GFSC feedback statement summarising responses to its December 2021 consultation on Professional Indemnity Insurance (PII) requirements for insurance intermediaries and insurance managers, together with a final draft of amended PII rules issued for a last 'fatal flaw' review before formal adoption. It explains which proposals the Commission is proceeding with, which it has dropped after industry feedback, and sets out the near-final wording of the amended Insurance Intermediaries Rules and Insurance Managers Rules.

• Aggregate cover cap: Licensees are not required to hold aggregate PII cover above £10,000,000, provided the board has assessed and documented that this level is appropriate for the business.
• Each and every loss minimum: Minimum cover per loss is increased to £1,000,000 (any individual claim limits set within the aggregate must not be less than this).
• Fee income basis: The 'three times fee income' test is replaced with three times income from regulated activities, with firms expected to consider extra cover if unregulated activities are significant.
• Proportionality and documentation: Firms must maintain PII consistent with the size and nature of their business and document how they determined the appropriate level of cover.
• Minimum policy terms: Cover must include negligence/errors/omissions, employee dishonesty or fraud (which may sit in a non-PII policy), liabilities of employees acting in their own name in the course of duties, liabilities in jurisdictions where the firm could reasonably be held liable, ombudsman awards where relevant, and legal defence costs.
• Defence costs proposal dropped: The proposal that legal defence costs should not erode the aggregate limit is not being taken forward due to limited underwriter availability.
• Retroactive date: Cover's retroactive date must be the date the firm was licensed, though the Commission may waive or vary this where disproportionate and clients are not put at materially increased risk.
• Excess/deductible loading: Where the deductible or excess on each and every loss exceeds £20,000, the minimum capital requirement increases to 125% of that deductible or excess.
• Insurer notifications: Licensees must notify their PII insurer of specified material facts (conditions, licence revocation, regulatory penalties, prohibition orders, criminal/regulatory proceedings or investigations) and notify insurers of most such events within 14 days, and must notify the Commission immediately of any termination, avoidance or invalidation of PII cover or of claims notifications made to insurers.
• Outsourcing consent (insurance managers): Insurance managers must obtain the Commission's prior written consent for changes to outsourcing arrangements and must inform the Commission within seven days of certain specified events.

The draft amended rules are being circulated for a final eight-week 'fatal flaw' consultation before formal adoption; comments were requested by 5 August 2022. Note the document title in the source metadata references Fiduciary and Capital Adequacy Rules, but the body text and rule excerpts actually concern the Insurance Intermediaries Rules and Insurance Managers Rules PII regime.

Key obligations

• Licensees must maintain PII and employee dishonesty/fraud cover of at least £1,000,000 on an each and every loss basis
• Licensees must maintain annual aggregate cover of £1,000,000 or three times income from regulated activities, whichever is greater, unless the board has assessed and documented that cover up to a £10,000,000 cap is sufficient
• Licensees must document the board's or senior management's assessment of the adequacy of insurance cover for the size and nature of the business
• Where deductible or excess on each and every loss exceeds £20,000, the licensee's minimum capital requirement increases to 125% of that deductible or excess
• Licensees must maintain cover for negligence/errors/omissions, employee dishonesty or fraud, liabilities of employees acting in their own name, liabilities in jurisdictions where they could reasonably be held liable, ombudsman awards where relevant, and legal defence costs
• The retroactive date of PII arrangements must be the date the licensee was first licensed by the Commission, absent a Commission waiver
• Licensees must notify their PII insurer of specified material facts when applying for cover, comply with policy warranties, and notify insurers within 14 days of specified regulatory or criminal events
• Licensees must notify the Commission immediately of any termination, avoidance or invalidation of PII cover, or of any claim notification made to their PII insurer
• Insurance managers must obtain the Commission's prior written consent before changing outsourcing arrangements and must inform the Commission within seven days of specified events
• Respondents to the fatal flaw consultation must submit comments by 5 August 2022

Applies to

insurance intermediaries, insurance managers, licensees carrying on finance business regulated by the GFSC

Deadlines

• 5 August 2022: Deadline for submitting fatal flaw comments on the draft amended Insurance Intermediaries Rules and Insurance Managers Rules
• 14 days: Period within which a licensee must notify its PII insurer of specified regulatory, licensing or criminal events (or the earlier period specified in the policy)
• seven days: Period within which insurance managers must inform the Commission of specified events (e.g., changes affecting outsourcing arrangements)
• immediately: Licensees must notify the Commission immediately of termination, avoidance or invalidation of PII cover, or of a claim/potential claim notification made to their PII insurer