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Professional indemnity edge: Anthony Howe

Early last summer, when capacity was beginning to reenter the PI market, Collegiate and no doubt other brokers were looking to persuade firms with waivers to consider reentry to the market, taking advantage of the less prescriptive rules laid down by the FSA. A number followed that advice but others have yet to take the plunge.

As the EU’s Insurance Mediation Directive comes fully into effect, the ability of the FSA to grant waivers to firms, exempting them from the requirement to buy PI cover, is rapidly running out. Those who took comfort from John Tiner’s remarks last year, that it might be possible to continue to grant waivers, will probably find those hopes dashed. His remarks were made in the context of a possible general market failure causing a problem among insurance and other intermediaries.

The state of the market is such that no general failure has occurred. Whereas, two years ago, limited capacity meant that firms that would have obtained insurance in the softened market were unable to do so, or only on terms that they regarded as punitive, nowadays most firms capable of being insured should be able to obtain cover.

The market is still tight. Many firms no longer have a relationship with an insurer, so cannot expect favourable treatment. But by agreeing for exclusions to be imposed in respect of more risky lines of business and higher excesses, it should at least be possible to buy catastrophe cover complying with FSA requirements.

Some IFAs consider catastrophe cover to be useless and the price extortionate. This is perhaps unfair. Whereas an IFA might through its own resources be able to meet a number of small claims (indeed, what would be the point of pound swapping with an insurance company?), every year there will be one or two bigger cases. It would be a challenge to any IFA to meet such claims out of its own resources. Hence, catastrophe cover offers a very real benefit, both to the IFA and the client, who, in the event of financial failure of the IFA, would be entitled to very limited redress from the Financial Services Compensation Scheme.

I think most IFAs would welcome the abolition of waivers. While some have been struggling to pay high premiums for cover, those with waivers have paid no premiums. Clients of those firms have unwittingly been at a disadvantage. There was perhaps surprisingly no requirement for IFAs with waivers to inform their client base. Had that been the case, it is possible that greater efforts would have been made to obtain cover or even pay premiums that would otherwise have been regarded as unacceptable.

IFAs which struggled to comply with the requirement also had the unhappy prospect of paying their share into the FSCS if the firm with the waiver went into default without the benefit of any form of protection.

The more flexible rules imposed by the FSA last year undoubtedly assisted the problem. Most IFAs with waivers should be able to obtain some cover although, with the need to reestablish a relationship with the market, they should not expect favourable treatment. The broker’s task is to reestablish those relationships, obtain the best terms for the client and work towards improving the risk so the loss record will become more favourable, creating a platform from which better terms can be negotiated.

Getting back on the ladder is the priority. The insured can comfort themselves with not having had to pay the very high premium levels of the last few years. These savings should substantially mitigate the pain of having to pay probably slightly over the odds to get back into the game.

Anthony Howe is chairman of Collegiate Insurance Brokers

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