ICAEW announces key Professional Indemnity Insurance changes, whilst scaling back on the full suite of proposed changes

21 May 2024. Published by Patrick Barclay, Associate and Hattie Hill, Associate

The ICAEW has confirmed some of the changes to its professional indemnity insurance (PII) requirements, which will come into effect from 1 September 2024.

Following a consultation period that concluded in December 2023, the ICAEW has set out the key changes that it will make to its PII requirements, which include:

  1. An increase in the minimum limit of indemnity for most firms to £2m for any one claim and in total, up from the existing limit of £1.5m.
  2. For firms with a gross fee income under £800,000, increasing the minimum limit to the higher of two and half times its gross fee income or £250,000, up from £100,000.
  3. Overhauling the definition of what is classed as a "large firm" (which do not require qualifying insurance in the same way as smaller firms) to be a firm with a gross fee income of over £50m, whereas the definition was previously based on the number of principals.
  4. Linking the maximum permitted excess to a firm's fee income, allowing it to be the higher of £3,000 or 3% of the firm's fee income.

Other changes relate to the dispensations process, group arrangements, and a general update to the regulations and guidance as a whole, to ensure they are easier to understand.

It is worth noting that the ICAEW has scaled back on or abandoned some proposed changes considered during the consultation period.  This follows what the ICAEW called "strong opposition" to some of the proposals, and the ICAEW wanting to avoid unintended negative consequences.

In respect of run-off cover, where firms cease, the existing requirement is to maintain compliant cover for at least two years, and to use "best endeavors" to maintain this for a further four years.  The proposed change set out in the consultation was to increase this to six years' mandatory cover.  Further, the cover would be non-cancellable for non-payment of premium, so minimum terms would provide six years' run-off cover automatically.  For consumers, this would bring run-off cover in line with civil claim limitation periods, offering greater protection.  For firms and insurers, however, requiring an additional four years of mandatory cover could be cause for concern, due to increased premiums and exposure. The ICAEW has watered down this proposed change, for now, on the basis of strong opposition, and insufficient data on the impact it would have on the market.  The new requirement is for firms to maintain compliant cover for at least two years and to "take all reasonable steps" to ensure cover is in place for a further four years.

Further earlier proposed changes not now being pursued include: the suggestion that certain firms would be able to apply defence costs to their policy excess; and the suggestion that insurers would be responsible for meeting the amount of any policy excess in respect of claims, where the firm was unable to meet this.  

The new regulations will come into effect from 1 September 2024, but will apply to each firm as it first renews its insurance after that date.  Once the market has reacted to these changes, we will see whether any of the abandoned changes return to the ICAEW's agenda.   In the meantime, it is clear that the developments will be of interest to both professional firms and their insurers, and it remains to be seen how significant an impact the changes will have on premiums.  Professional firms will do doubt wish to discuss the changes further with their brokers.

The ICAEW's news bulletin on the changes is here.

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