Underwriter exhausts capacity as FSA confirms IFA cover rules

One of the last professional indemnity (PI) underwriters closed to new business last week, as the FSA released its consultation paper on PI for IFAs.

PI underwriting agency Magian exhausted the capacity it was allocated by Trenwick and closed to new business.

Magian's underwriting director Bruce Heasman said he was currently seeking new capital.

"Don't write us off yet," he said.

Magian's closure left only two sizable insurers - The St Paul and Chubb - and underwriting agency Collegiate offering PI cover for IFAs.

This week the FSA's consultation paper CP 169 formalised its relaxation of the mandatory terms and conditions for IFA cover.

It first relaxed its requirements in November 2002, after 24% of IFAs that renewed during the traditional September period failed to obtain compliant cover.

The paper also suggested long-term changes to regulation of IFAs' PI cover.

CP 169 proposed that IFAs with turnover of £10m or more be exempt from mandatory cover.

It suggested a greater relationship between a firm's capital and its cover requirements.

It also proposed a "two-tier" system that allowed IFAs to have less cover, as long as they advised clients of this on their sales documents.

Association of Independent Financial Advisors (AIFA) policy and technical services director Fay Goddard said interaction between capital and cover would give IFAs more flexibility in the long term.

But she said easing cover regulations on £10m-plus firms would only directly provide a solution for between 20 and 30 firms.

"It may have a knock-on effect if those firms do give up their cover, in theory creating more capacity for smaller firms," she said.

Goddard was not optimistic that new insurers would enter the market.