Professional Indemnity Insurance – Excesses and Exclusions

We issued a couple of newsletter articles recently regarding the FCA’s ‘will they, won’t they’ change the capital adequacy requirements rules. For the time being at least, they won’t be changing the rules until the end of 2015.

However, we are taking the opportunity to remind all firms that you may potentially need to hold additional capital resources depending on your PI cover.

The FCA has rules that impose additional capital resource requirements if your firm’s PI cover has increased excesses over the ‘standard’ £5,000 for investment firms and £2,500 or 1.5% of annual income (assuming you don’t hold client money) for mortgage and insurance firms. 

What you may not be so familiar with is that additional capital may also be required if your PI policy has exclusions written in it. Deciding whether this applies to your firm can be complicated and will depend on the context of the policy wording and whether or not you advise or conduct business for the excluded business category. You should check your policy carefully and understand the nature of the exclusion. A typical exclusion could be ‘Failed Banks / Suspended Funds’ which could be open ended or could have a ‘prior to’ date.

Depending on the type of advice your firm offers you may be affected by the IPRU-INV prudential sourcebook (investment firms), the MIPRU prudential sourcebook (mortgage and general insurance firms) or both. When firms are planning and completing their RMAR returns they should refer to the rules contained therein and also use the RMAR Help Text to ascertain the additional capital requirements.

To calculate any addition capital needed over and above the base requirement, you will need to refer onto chapter 13 of IPRU-INV, specifically 13.1.21R exclusions, and on to the tables at 13.1.23R for the exclusion calculation table and 13.1.27R for excess calculation table. The rules can be found here. Unfortunately this is a PDF document that is over 360 pages long so you will have to start searching at around page 195.

Those firms that advise on mortgages and insurance will need to look at MIPRU 3.2, in particularly the table at MIPRU 3.2.14R here.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

This is a regulatory requirement that all firms need to comply with. It is important that you understand the requirements and plan accordingly to build up capital if necessary.

Action Required By You

  • Carefully check your PI policy for all additional excesses and exclusions;
  • Check to see how these will affect your capital adequacy requirements;
  • If you are unsure of any of the requirements, please seek guidance from your ATEB consultant or PI broker;
  • Your accountant should also be fully conversant with the requirements.   

About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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