Measures introduced will improve PII processes
Insurers, under pressure to improve their profitability, are worried about a potential increase in claims resulting from problems caused by Brexit, Covid and the extended exemption from Stamp Duty Land Tax (SDLT). As a result, coverage has become more difficult to access for new and existing practices, and prices have increased.
Some insurers refusing to accept new customers, competition in the market is greatly reduced. This is a very serious problem when it is mandatory to buy cover in this market. That said, the CLC practice renewal process this year was smoother and less disruptive than last year.
The CLC was forced to intervene last year after two insurers, fearing SDLT furloughs could trigger a new wave of claims, offered companies cover that did not comply with our minimum insurance conditions (MTCs) in n not integrating run-off hedging or by imposing very significant overruns.
Given the concerns that already existed, this prompted us to review our policy and following a six-week public consultation earlier this year, during which we gathered views from insurers, brokers and consumers as well as transfer agents, we presented our reform plans to our supervisory regulator, the Legal Services Board (LSB).
The changes we proposed were limited, but those we felt were necessary to support a healthy and competitive PII market that provides affordable and proportionate coverage, encourage innovation and growth, and continue to protect customer interests.
The LSB accepted our proposed changes, giving them the stamp of approval last month. The new rules below come into effect for the policy year which began for CLC companies on July 1 of this year.
- Companies will now have to submit at least one PII application two months before the renewal deadline, with insurers having to respond at least one month before the deadline, June 1, to any proposals received before May 1.
This was proposed in a bid to reduce the risks involved when companies and insurers renew until the June 30 deadline. We hope this will make the renewal process smoother than it was before, giving practices time to seek alternative coverage if needed and to better plan the outcome.
Other proposals may be submitted by firms and quotes issued by insurers in June.
Insurers will be required to publish a practice’s claims history within five working days of a request, which should help practices seek alternative cover.
We will also continue to work with brokers and insurers to improve the availability of cover for start-ups and businesses transferring to CLC from other regulators.
- Insurers will now be required to provide an automatic 90-day extension of coverage – pro-rated based on the most recent annual premium – in the event that a practice is unable to renew coverage. The firm must not undertake any new work during the extended coverage period and, if coverage is found during this period, the new insurer will backdate the policy to July 1.
This will not apply to practices whose insurer has notified them and the CLC, no later than three months before the expiry of the annual cover on March 31, that it will not be offering renewal. It also won’t apply if the reason the company can’t renew coverage is because the CLC is taking action for regulatory violations.
Our new MTC and Participating Insurers Agreement, which will come into effect on July 1 this year, will govern policies taking effect from the March 31 expiry date.
- Companies and insurers will be allowed to agree on a higher level of deductible, but only when the CLC has approved it following a joint submission.
However, the CTC is unwilling to compromise customer protection by leaving it open to agreeing a high deductible unless companies and insurers come together to present a particularly compelling case.
We have also introduced a new tier of maximum deductibles for larger firms, an additional 1% on fees over £1,000,001.
- We will maintain built-in liquidation cover and, as is currently the case, insurers will be required to ensure that the annual premium they collect includes an amount that reflects the risk of liquidation of the insured business during or end of this insurance year.
Despite requests from insurers to introduce a separate premium for wind-up without cover if it is not paid, we concluded that the risk to consumers of wind-up cover not being in place was too great. This was supported by the experiences of other regulators not pushing for it to be incorporated into the main PII policy, which showed that many businesses that close do not pay their run-off coverage premium.
- We will not introduce mandatory cyber coverage due to the current challenge of defining the necessary characteristics of a good policy. However, we urge practices to ensure they have adequate protection that meets their particular needs and have added to our advice on best practices for cyber security to help with this.
We believe the reform package we have agreed with the LSB is fair to our regulated community and to insurers, and at the same time meets our primary responsibility to protect the interests of consumers. A strong and sustainable PII system is the cornerstone of our regulatory approach, and we will continue to monitor its effectiveness during the renewal cycle, as we do every year.
We urge all practices, and indeed businesses in general, to think more carefully about the business profile they present to insurers. Companies must be able to explain the type of work they do, that they understand the risks involved, and that they have processes in place to mitigate those risks where possible. Companies that can demonstrate this will likely find it easier to get coverage on the next renewal.
Additional guidance on this and other challenges facing the industry can be found in our recently released 2022 Risk Agenda, available here.
Stephen Ward is Director of Strategy and External Relations atBoard of Approved Carriers