ICAEW set to overhaul professional indemnity insurance

ICAEW set to overhaul professional indemnity insurance

Nov 16, 2023

ICAEW is planning to raise the minimum level of cover on professional indemnity insurance claims to £2m for large accounting firms to offset the rising cost of claims and inflation

The institute said the professional indemnity insurance (PII) cover needs to be reviewed due to the ‘changing nature of the structure of firm and their insurance arrangements, pressure to manage the cost of insurance and an increase in firms unable to source qualifying insurance’.

The changes will affect all size of firms with enhanced cover required. It is 15 years since the current limits of insurance were last increased in 2008, despite periodic reviews of insurance arrangements for accountancy firms.

Professional indemnity insurance (PII) is mandatory for ICAEW members in public practice and individuals and firms that undertake activity which is regulated by ICAEW, including audit, insolvency and probate.

The review is being led by the ICAEW Regulatory Board, which plans to increase the minimum level of indemnity from £1.5m to £2m as ‘the minimum limits may now be insufficient given the rising costs of claims and inflation’, and raise the basic cover requirement for smaller firms.

When ICAEW surveyed members earlier this year, the majority of respondents said one of their biggest challenges was the price of insurance.

‘The majority of respondents to our survey thought that the current limits were about right or too high, therefore, they may be disappointed with our proposed change,’ ICAEW noted in the consultation.

‘However, based on our analysis of firms’ annual returns, we understand that most ICAEW firms purchase cover on “any one claim” basis, usually over and above the minimum limit specified in the regulations, so we do not anticipate that this change will cause any increase in premiums to the majority of ICAEW firms.’

The current minimum limit of indemnity for firms with gross fee income of less than £800,000 will be raised from £100,000 to £250,000.

ICAEW said it did not expect this to result in a significant increase in the cost of insurance. ‘Given the low minimum limits of these policies, a significant part of pricing will relate to the fixed costs of issuing the policy and so any increase in premium is likely to be minimal,’ ICAEW said. ‘We consider that this is offset by the increase in financial protection for the consumer, as well as the firm itself.’

The PII Committee is recommending the following changes to ICAEW’s PII arrangements:

The minimum limit of indemnity should be increased so that firms will be required have a £2m limit any one claim and in total limit of indemnity. Defence costs will continue to be in addition to the limit of indemnity.

If a firm’s gross fee income is less than £800,000, the minimum limit of indemnity for any one claim and in total should be equal to two and a half times its gross fee income, with a minimum of £250,000.

If a firm’s gross fee income is over £50m it will be classified as a ‘large firm’. Large firms will not be required to put in place qualifying insurance but they will continue to have the obligation to have in place reasonably appropriate arrangements for their exposure to risk which is qualitatively assessed.

The self-insured amount should be structured to permit an excess rather than a deductible (so that the full extent of the limit of indemnity would be available above any excess).

Generally, defence costs should not be applicable to the excess (except in the case of FCA authorised work, as is currently the case). However, if a firm’s gross fee income is over £800,000 then the excess may be applied to defence costs.

For firms required to put in place qualifying insurance, the maximum permitted aggregate excess will be the higher of £2,500 or 3% of the firm’s fee income.

If a firm fails to pay a claimant any amount which is within the excess due to its insolvency, the insurer will become liable to remedy the default on the insured firm’s behalf.

Further guidance will be provided regarding ‘compound firms’ to make it clear in what circumstances firms can insure multiple entities within a group under a single policy of insurance.

Qualifying insurance should provide automatic run-off cover for six years, which is non-cancellable by insurers for non-payment of premium.

The guidance regarding applications for dispensation should be updated to ensure the process is clearer and more transparent. A fee for processing dispensation applications will also be introduced.

‘We encourage you to comment on the proposed changes including our analysis of the potential challenges and impact. We acknowledge that this is a technical area and that any changes require a careful balance between acting in the public interest while also maintaining a functioning PII market with enough capacity that offers affordable premiums,’ an ICAEW spokesperson said.

ICAEW will report back on the outcome of the consultation in early 2024, but has not given an indication of a timeline for the implementation of any new rules.

The consultation will close on 14 December 2023.