Proposed changes for professional indemnity insurance (PII) run-off in the UK

7 The responses to the options

Option 1 - Introduce terms to the minimum wording policy that the last insurer must provide at least six years' run-off cover subject to the payment of annual premiums

  1. This was broadly seen as protecting consumers, though some responses questioned whether it solved the core reason for their vulnerability, i.e. how to enforce that PII run-off premiums are paid after de-registration.
  2. Insurers unanimously noted that it would increase costs and decrease availability. Some expressed concerns about whether increased costs of PII outside of run-off would drive more firms towards the ARP as it currently stands.

Option 2 - Extend the Assigned Risks Pool (ARP) to provide risk cover

  1. The profession viewed this option as strongly supporting consumer protection. Insurers were more mixed in their responses with some underlining that if 'adequate and appropriate' was not to be amended and annual premiums remained the status quo, opening the ARP to provide run-off would not solve the problem. Insurers also underlined that the expenses for a firm entering the ARP would rise with their involvement in the mortgage valuations market.
  2. On the issue of defending against the practice of 'phoenix firms' it was pointed out that making upfront run-off PII (a single prepayment at the beginning) mandatory, would take away a lot of incentive for the practice.
  3. As an aggregate figure, £2m being the minimum level of cover required was seen as enough, if extra levels of cover were also possible.
  4. The estimated cost implications of requiring a prepayment for six years of run-off, as set out in the consultation document (i.e. 100-150% of the annual premium) was seen as accurate by half of the insurers, with the other half suggesting it may be higher (up to 200-450% of the annual premium).
  5. This option was preferred by insurers with detailed knowledge of the ARP. The inclusion of the ARP could be done on a case-by-case basis in pre-negotiated criteria. In this way it could be separated from the existing activities of the ARP. This process of applying pre-negotiated criteria could consider the claims history of the applicant to set premiums commensurate with the firm's risk profile. Some practical barriers were noted such as overall market conditions and the schedule for when changes could be made to the ARP, i.e. annually from 1 April to 31 March.
  6. Overall this option attracted the least criticism across responses.

Option 3 - Mandate the incumbent insurer to provide six years' run-off under the minimum wording policy

  1. The overall response from the profession was that they did not see the advantages of this option outweighing the negatives (e.g. increased cost).
  2. The profession was concerned that the cost would push run-off out of reach of firms. There were general queries on how the risks of the surveying profession compared to others.
  3. The view of insurers was strongly negative on this proposal and did not agree that the benefits outweighed the costs. One response suggested small firms would be negatively impacted in this scenario. Insurers did however broadly agree with the projection of what would happen in the consultation document with regards an increase of premiums (70-100% increase).

Option 4 - Require the incumbent insurer to provide six years' run-off under the minimum wording policy for consumer claims only

  1. A wide range of definitions for 'consumer' were suggested, including those used by other organisations, e.g. SRA/FCA/FOS. One response suggested a consultative approach would be best to establish this.
  2. The profession noted the likelihood of increased premiums if this option was pursued. There were mixed opinions on whether this would create a separation between requirements on consumer-facing and commercial-facing firms. It was noted that corporate commercial accounts rarely go to small surveyor firms, but at the same time the separation of consumer and commercial claims was seen as likely to polarise the market.
  3. Most insurers felt this option would have a negative impact as the increased requirements would drive insurers out of the market, reducing competition and therefore potentially increasing premiums overall. Other problems listed were that it does not address commercial claims and may lead to vigorous challenges as to what constitutes a consumer versus a commercial claimant. They did see the implication of carving out the 'household' consumer protection as being positive for smaller/regional/non-lender focused businesses.

Option 5 - Create a special purpose fund that covers all run-off for RICS firms

  1. The profession had mixed views on this option, with broad acknowledgment that it would lead to a less competitive insurance market that would damage PII provision overall.
  2. The question of how such a model would function in an economic downturn was addressed by both the profession and insurers. Concerns were expressed over whether it would survive a dramatic increase of claims as seen in the 2008 financial crisis.