The Great Unknown - PI... comply...goodbye?

The question of solvency requirements and the need for professionalindemnity (PI) cover are probably the two most pressing issues facingbrokers at the moment.

Experts reckon most intermediaries have until midsummer to decide whetherto press ahead and plan to meet the new Financial Service Authority (FSA)requirements - whatever they might be - or whether it is time to quit.

And with thousands of small brokerages run by those who established theirbusinesses in the 1970s, when previous regulatory authorities changed, thefear is that many of these owners, now aged in their 60s, are most likelyto opt out - resulting in a massive 'experience drain' from theindustry.

FSA consultation

The picture is far from clear, and this only adds to the anxiety of allthose involved. At the time of going to press, the FSA was in the middleof consultation over the compulsory PI requirements already in place forindependent financial advisers (IFAs), but had only just begun to askquestions of general insurance brokers - even though the EU is demandingimplementation by 2005, a mere 18 months away.

David Kenmire, director of the investment changes division at the FSA,says his organisation is concerned that the compulsory PI requirementalready imposed on IFAs is causing that sector problems. Finding suitablecover is proving very difficult, as insurers are unwilling to offer coverto IFAs who might face major pension reviews. He adds that the FSA is alsowatching and waiting to see what emerges from the Office of Fair Trading'sand Department of Work and Pensions' review of employers' liability, andadds that it has learnt from past experience and does not want to imposeunworkable demands on an industry sector.

On the general insurance side, the FSA is asking a wide-open questionabout whether there is even capacity in the market to provide PI cover,but Mr Kenmire points out that, since Gisc rules already require generalbrokers to have indemnity insurance, it is not a wholly new concept to thesector.

A survey from the British Insurance Brokers' Association (Biba) publishedat the end of March, showed, however, that there was widespread industryconcern on this issue. Asked what impact such regulation might have, 48%were negative about it, 34% were positive and 18% were undecided. A moreworrying statistic was that some 42% of those questioned admitted theywere not coping with existing levels of paperwork, never mind the prospectof another tier of regulation and associated documentation. JenniferWeller, head of communications for Biba, said the 320-page document fromthe FSA was daunting for many people, particularly those runninghigh-street operations who are leaning towards retirement.

Too great a burden

She believes this may be the final straw for many such businesses, whichwill either disappear or merge with larger groups. She said she has hadcalls from people, newly appointed as company compliance officers, who saythey just do not know where to start. Biba is trying to help, offeringcompliance courses and advice, but its spokeswoman says: "The FSA needs toassuage some of these fears," adding many brokers are concerned that, notonly will they have to achieve a certain level of compliance in 2005, butthat there will also be annual reviews which will take up too muchrevenue-earning time.

Andy Dore, PI underwriting manager for PRI, says conditions are hardeningfor brokers' PI cover, and he also fears regulation could draw in manysectors not currently obliged to have it.

He says that, if the FSA were to impose minimum limits for PI cover, alongwith minimum deductibles, underwriters would have little to play withexcept premium price - and, in what is a hardening market, rates arelikely to go up.

He also expects to see a surge in mergers and acquisitions as the sectorconsolidates, but feelsbrokers may also look to join networks to buy PIcover as a group rather than as individuals.

Mike Dickson, marketing director of Dickson Manchester, says there arealso questions about who will qualify as a general insurance broker. Hequestions whether the new rules will encompass absolutely everyone whosells insurance - for example, the local vet who earns a pound or twoevery time he successfully refers a client to Petplan.

Mr Dickson thinks the cost of PI cover would also be a real problem formany small, high-street brokers. Only a couple of years ago, a policywould cost around £450, while today it is more likely to be £1,500.

Like Mr Dore, he expects to see many smaller brokers choosing to formco-operatives - but, like many others in the industry, he also believes itwill "prompt a significant number of brokers to shut up shop. Not becauseof PI, but because they can't be bothered to deal with yet anotherregulatory authority."