The ICAEW Regulatory Board (IRB) is consulting on proposed changes to ICAEW's professional indemnity insurance (PII) arrangements for transparency and to ensure that they are consistent with its duty to act in the public interest. Consulting also helps protect against any unforeseen or unintended consequences that may be brought about by the changes.

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.

This consultation is likely to be of interest to ICAEW members, ICAEW member firms/regulated firms and their clients, non-members who are registered with ICAEW for a regulated activity, ICAEW's participating insurers, insurance brokers as well as consumers and consumer groups and other professional services regulators. In addition, we also welcome responses from the Institute of Chartered Accountants Scotland (ICAS) or Chartered Accountants Ireland (CAI) firms as the insurance arrangements are shared between the three Institutes and any resulting changes may also impact these firms.

The consultation will run between 18 October and 14 December 2023.

Background

ICAEW's role as an improvement regulator is to strengthen trust in ICAEW Chartered Accountants and firms. We do this by enabling, evaluating and enforcing the highest standards in the profession.

We act in the public interest, and it is part of our role to strive to ensure ICAEW Chartered Accountants and ICAEW supervised/regulated firms act with integrity and undertake work correctly and to the highest standards. Most people receive a good service, however, when things do go wrong the impact can be profound; both financially and personally.

PII is mandatory for ICAEW members in public practice and individuals and firms that undertake activity which is regulated by ICAEW under statute ie, audit, insolvency, exempt investment business and probate (for simplicity we will refer to this group as 'ICAEW firms' in the remainder of this document). Insurance plays an important role in protecting the public interest and maintaining public confidence in instructing ICAEW firms. We set and monitor compliance with the minimum level of PII cover for ICAEW firms.

Firms which are within scope of ICAEW's regulations currently have a duty to take reasonable steps to meet claims arising from public practice. As part of this duty, firms/groups of firms with fewer than 50 principals must put in place 'qualifying insurance'. This is insurance which:

• is provided by a 'participating insurer'[1];
• complies with ICAEW's minimum approved policy wording; and
• provides six years' retroactive cover (ie, cover for claims arising in relation to activities carried on by the firm during the last six years save for circumstances and claims known about prior to the inception of the policy).

Why are we consulting?

Several issues have necessitated the need for review of ICAEW's PII arrangements including:

• The changing nature of the structure of firms and their insurance arrangements;
• financial capacity of members and entities to retain (self-insure) risk;
• pressure to manage the cost of insurance; and
• an increase in firms unable to source qualifying insurance.

ICAEW's PII Committee [2], is responsible for keeping under review ICAEW's policy on compulsory PII and considering revisions to the PII regulations. Although amendments have taken place periodically, a wide-ranging review of all the insurance arrangements has not taken place for some time and that the current limits of insurance have not changed since 2008.

In 2022, the IRB requested the PII Committee, together with senior managers from ICAEW's Professional Standards Department (PSD) to conduct a review of the PII requirements with the aim of ensuring they remain fit for purpose and provide adequate protection to the public and to firms, while being mindful of the cost and availability of insurance to the profession.

Call for evidence and stakeholder engagement

A call for evidence was launched in April 2023 to gain a better understanding of issues faced in the insurance market. We conducted an online PII survey that sought views from a broad range of members and also a series of targeted meetings so that we could have detailed discussions with a range of stakeholders.

The key topics of discussion centred around the following areas:

1. How much insurance should firms have, and how should the amount be calculated/vary depending on firm size etc?
2. How to address the use of very large commercial insurance programmes (including captives).
3. What run-off cover should be required for firms ceasing to trade?
4. Arrangements and qualifying conditions for dispensation

We were pleased to hear that generally respondents felt that our current arrangements worked well and ICAEW firms were able to purchase compliant insurance at a level they desired and that was appropriate for their business. The biggest PII challenge for respondents to our survey was price.

The discussion questions and key themes gained from the call for evidence responses are referred to throughout this consultation. We have used this insight, in collaboration with the PII Committee and IRB, to help formulate the proposed changes to arrangements.

Summary of proposed changes

Following its review of the responses to the call for evidence, the PII Committee is recommending the following changes to ICAEW's PII arrangements:

• The minimum limit of indemnity should be increased, so that generally, firms will be required have a £2million 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.[3]
• 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.
  • Automatic run-off cover would be for a single aggregate limit of indemnity across the entire six-year run-off period. This limit would be calculated in the same way as the annual aggregate minimum limit required by the firm's qualifying insurance directly preceding the cessation of the practice.
  • Participating insurers should be required to outline at inception of a policy how the premium for run-off cover will be calculated.
• 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.

[1] A list of insurers is available here.

[2] Access further information about the function and operation of the PII Committee

[3] Currently firms are permitted to have an aggregate deductible of £30k x number of principals.

Equality, diversity and inclusion (EDI)

We have considered whether there are any specific risks for EDI purposes and we have not identified any adverse impacts.

Our view is that the proposed changes increase public protection for consumers across all communities. We also think that the changes will maintain a good level of protection for ICAEW firms of different sizes.

We welcome any feedback in relation to this analysis and intend to consider EDI impacts through our continued monitoring activity and will ensure that we continue to consider any changes to EDI impacts as the project continues.