In December 2016, the FCA published a thematic review (TR16/9) of general insurance intermediaries' ("GI intermediaries") professional indemnity insurance ("PII"). From the population of over 6,000 authorised GI intermediaries the FCA has reviewed the PII of nearly 200 firms. The purpose of the review was to see whether the firms complied with the requirements of the FCA Handbook in the Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries ("MIPRU") and to assess more generally how the market is functioning. This review included Lloyd's brokers, intermediaries acting as MGAs and insurers carrying out intermediation.
It is a requirement of the MIPRU for GI intermediaries to have PII or an appropriate MIPRU alternative in accordance with MIPRU 3.
The good
The FCA found good availability in the breadth of cover (for claims arising from the range of intermediary activities: insurance broking, being a MGA, claims handling etc.) and firms were able to obtain high limits of indemnity.
The bad
- The FCA identified gaps and inaccuracies in coverage, which suggested firms had not been reviewing policies appropriately
- Policies with no explicit provision for awards by the Financial Ombudsman risk not meeting the requirements of MIPRU
- Some firms did not have the minimum level of cover required or had a policy excess that was greater than the FCA permits
- Firms that use Appointed Representatives and have policies which do not make explicit provision for Appointed Representatives risk not meeting the MIPRU requirements.
- The FCA was particularly critical of unclear and out of date language. One policy reviewed included a Y2K compliance clause. Others clauses reviewed referred to the 'FSA' and the 'DTI' rather than the 'FCA'. Are these clauses still in your policy?
The ugly
The FCA was concerned by the wide range of exclusion clauses and the effect they had on limiting a firm's ability to recover under the policy. The FCA found the following exclusion clauses in GI intermediary policies to be problematic in terms of not meeting the MIPRU requirements:
GI intermediation
A policy that excludes GI intermediation excludes the activity for which the cover is required. The FCA found that the following clause excluded GI intermediation altogether and it was not overridden by any specific policy terms or endorsements:
‘Any regulated activities as defined in the Financial Services and Markets Act 2000, as amended from time to time…
…arising from Insurance and Investment Services regardless of whether or not such Insurance and Investment Services are in contravention of or breach FSA 86 or FSMA.’
Suitability of insurer
The FCA found the following to be inconsistent with the MIPRU requirement for cover to be for insurance mediation:
‘Any claim arising from advice by the insured on the suitability (which expression shall, without prejudice to the generality of such term, include financial standing) of any insurer with whom any insurance (including reinsurance) is placed.’
Exclusion for any business with an unrated insurer and non-admitted insurer
The FCA found the following to be inconsistent with the requirement in MIPRU for cover to be for claims for which the firm may be liable as a result of its conduct.
‘…arising directly or indirectly out of the placement of insurance or reinsurance with any insurer or reinsurer who, at the time of the placement, held a financial strength, credit or other similar rating of less than A- from any one of A M Best, Standard & Poor’s, Moody’s or Fitch Ratings. However, this EXCLUSION shall not apply where you have obtained written agreement from your client to place their insurances with this insurer or reinsurer.’
‘Any business placed with any insurer or reinsurer who is not authorised to transact insurance business in the United Kingdom by the Department of Trade and Industry or any other equivalent European regulatory body, unless you have informed your client of this and of the fact that the policy will not be protected by the Policyholders Protection Fund and your client has nevertheless given you written instructions to place the business with that insurer.’
Insurer insolvency
The FCA is not satisfied that a broadly drafted insurer insolvency exclusion clause would meet the MIPRU requirements. If, for example, an intermediary failed to increase the sum insured in accordance with a client's instructions and that client's insurance is placed with an insurer that becomes insolvent then there would be no cover under the intermediary's PII. This could result in negligence by the intermediary for selecting an insurer that consequently became insolvent.
Next steps
The FCA intends to engage with relevant trade bodies to ensure that the issues arising from this review are understood. Product providers (insurers and MGAs) should also consider whether exclusions within their policies mean they are providing unsuitable products for their GI intermediary customers.
The FCA expects those GI intermediaries not included in the review to consider their PII policies to ensure compliance with the MIPRU requirements. We encourage firms to complete this review as soon as possible and we can offer support and guidance on this review process.
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