The majority of the industry is in favour of creating an industry mutual in a bid to solve the probl...
The majority of the industry is in favour of creating an industry mutual in a bid to solve the problems in the PII market, the FSA says, but most think it should be on the condition that firms are assessed on a risk basis with the mutual having a right to refuse cover.
This comes as the City regulator today outlines the industry's solutions to the dilemma in its CP 193: 'Professional Indemnity Insurance for personal investment firms: proposed policy and rules'.
According to the FSA, many of the respondents believe that the regulator should be closely involved in setting up an industry mutual as well as supervising it.
Responding to that, the FSA says: "As a regulator, we do not believe it is our role to provide insurance, whether commercial or otherwise. Therefore, setting up an industry mutual is not a role that we can undertake."
"However, we are in regular dialogue with PII brokers, underwriters, personal investment firms and trade bodies regarding several possible solutions to improve capacity in the PII market."
Other solutions that have been suggested by the industry are to create either a sinking fund or a captive scheme.
A sinking fund - which is established through a group of individuals investing money to pay off a liability at a known future date or to pay liabilities as they fall due - would have to be set up by members of the industry.
The FSA believes there are two key issues that arise from this proposal. Firstly, it is important to estimate the size and quantity of claims for the year ahead, the regulator says, as an underestimation could lead to shortfalls that in the end could lead to the liquidation of the fund.
It is also essential to control which firms are allowed to enter the fund as there is a danger that firms with good risk management systems and controls and minimal claims experience would end up subsidising the claims of weaker firms.
The other proposal suggested by the industry is the creation of a captive scheme. This kind of scheme is usually one owned by a single firm to meet its own insurance requirements where the parent company fund the captive rather than paying an insurance premium.
But captive funds are not permitted in this country and captives that are set up abroad will be subject to the solvency margin rules that apply in that country, the FSA says.
The FSA will also continue to have discussions with personal investment firms and other organisations examining other solutions to the current problems in the PII market.
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