The review focused on two key areas:
- to ensure that private consumers are adequately protected by the current policy and
- to enable regulated firms to close down by being able to obtain the run-off cover they require.
Five options were put forward for discussion in the consultation document. These ranged from opening the RICS Assigned Risk Pool to firms unable to obtain run-off to the establishment of a Special Purpose Fund.
Our own response ran to several pages but in summary, our views are as follows.
None of the options contained in the consultation document address the fact that many firms that fail to obtain run-off cover do so because they have insufficient funds to cover the cost.
We believe that the only way to guarantee the affordability and availability of run-off cover and to ensure adequate protection for all clients is to:
- Incorporate the cost of run off cover into a firm’s normal PI cover whilst they are trading.
There is a precedent for this recommendation. The Council of Licensed Conveyancers introduced this arrangement in 2016 for their 200+ members. Conveyancers are the highest risk profession, in terms of PI insurance and total insurance spend by the CLC community is significantly lower than the total insurance spend by the RICS regulated community. The CLC run-off policy provides a £2m in the aggregate limit of indemnity. Whilst this limit would be adequate for the majority of surveying firms, consideration would need to be given as to whether this is an appropriate limit for a firm that has undertaken a significant number of lending valuations.
Our recommendation is likely to have an immediate upward impact on premium which will be more marked for those firms where insurers believe they are approaching the point at which run-off is required. It does however have the added benefit of allowing firms to close down, safe in the knowledge that their run-off bill is paid and the Principal’s personal liabilities are protected. It would also be extremely well received by Commercial clients, particularly lenders.
Within the CLC environment, insurers have simply had to accept that some firms may move to the new PII model with run-off cover incorporated and then close after the 1st year. However insurers are entitled to ask for a business plan including details of succession planning and can therefore charge higher premiums for those firms where they believe this to be a risk
Irrespective of which Option is adopted, the move to the new model should be made as soon as possible whilst the insurance market remains relatively soft.