Financial services has generated more professional indemnity insurance claims than any other sector....
....so the premiums and market capacity for this sector can be extremely volatile.
So it's important to have some understanding of how this insurance market works to be able to make an informed decision on which product is best for your firm.
In this short guide we take a look at the main issues surrounding professional indemnity insurance for IFAs and provide information that you will hopefully find useful.
If you don't find what you are looking for call us on 0345 251 4000 and we'll be pleased to help.
Compulsory insurance for all IFAs
Since the 1980's, professional indemnity insurance has been compulsory for all Financial Advisers and has been the source of much controversy ever since.
It is the insurance cover that protects businesses in the event that a client claims to have suffered a loss as a result of professional negligence. The Financial Conduct Authority (FCA) requires that all firms it regulates must carry a specified minimum level of indemnity - or cease trading.
The policy has to be renewed annually and the process of securing the most appropriate level of coverage, with the least restrictions, excesses and exclusions, whilst minimising premiums, can be extremely challenging.
Options have become severely restricted
Over recent years financial advisers have generated more professional indemnity insurance claims than any other profession. The sector has also found itself mired in significant instances of fraud. On top of this IFAs face an escalating level of uncertain risks - associated with the introduction of Pension Freedoms, for instance.
This perfect storm of adverse factors means that the industry is now more heavily regulated than ever before and that there’s a smaller number of insurers willing to provide cover.
The remaining insurers face less competition, which enables them to increase premiums in a bid to recoup their losses. IFA firms are faced with steeply increased premiums combined with higher excesses and more restricted cover, particularly for higher risk products. In extreme circumstances IFA firms may not be able to secure any cover at all.
The cost of professional indemnity insurance
Premiums usually range between 1% – 2% of turnover, with minimum premiums of £ 1,000 plus insurance tax. However, the rate will be dependent on a number of different factors which the underwriters will consider carefully. It's necessary to supply a considerable amount of information that enables them to assess the level of risks your firm is exposed to and the premium will then be based on this assessment.
From the IFA’s point of view it is foolish to compare professional indemnity insurance policies based on premium alone. You need to fully understand exactly what kind of cover you are getting for your money – before you make a claim and discover that the wording does not mean quite what you thought.
There have been many instances of coverage disputes occurring in this marketplace and the best way to avoid this situation is to get specialist advice from a broker at the outset. Call us on 0345 251 4000 – we’re happy help you find exactly the cover you need, and peace of mind, for the lowest possible premium.
Why almost all IFAs use a broker
Given all the issues surrounding professional indemnity insurance for IFAs, it's no surprise that almost all firms use a specialist broker. The broker’s expert knowledge is invaluable when it comes to securing the most appropriate cover, with the least restrictions, excesses and exclusions, whilst minimising premiums. Their advice and assistance is not only hugely beneficial throughout the application or renewal process, but especially so if a claim should arise.
For a quotation or free advice call us on 0345 251 4000. Also read our guide Why You Need An Insurance Broker.
How to make the best possible case for your firm
When an IFA firm goes through the application process it is important to present the business accurately, but in the best possible light. If you fail to do this your premium may be higher than necessary, your cover may be more restricted than you’d like and you may encounter problems if you make a claim.
The underwriters will want detailed information covering:
- Total commission / fee income - one of the clearest indicators of the exposure to risk that you represent.
- Business split – extent to which the firm is involved in high risk activities
- Complaints and claims history - insurers will want to know the circumstances and any measures taken to prevent a recurrence of the situation as well as subsequent changes to procedures, such as internal reviews and the introduction of sign-offs.
- Client documentation - insurers may require sight of the standard documentation that a firm uses, such as engagement letters, Terms of Business, fact finds and reports. These documents can help show how well defined your services and audit processes are and whether they can be relied upon to help defend a claim.
- Compliance - insurers will consider the internal compliance functions within a firm. Your position may be further strengthened if you have an external compliance provider who conducts regular reviews on your business.
- Internal risk management – if you have a robust system in place, one that puts you in a strong position to defend claims, then insurers will look more favourably on your firm.
- Personnel – the quality of the team regarding experience, qualifications and training are all very important. If a firm is part of a quality group or network, then this will also be viewed positively as it normally indicates a higher set of standards.
Important features to look for in a professional indemnity insurance policy
When reviewing the wording pay particular attention to the following:
- Are there any exclusions for any of the activities your firm is involved with? If the answer is “yes” this will leave your firm exposed should a claim arise, including for work you did in the past. You may also be required to carry additional capital as set out by the FCA.
- Are Defence Costs payable in addition to the Limit of Indemnity? Policies with this feature provide the best form of cover. If you see that Defence Costs are included in the Limit of Indemnity this will actually reduce the sum available to settle any claims.
- Are Defence Costs subject to any excess? If you see Defence Costs applicable to the excess, insurers can appoint solicitors to defend the case but you will be responsible for the excess applicable.
- Does the policy have an Insolvency or Failed Fund Exclusion? A common exclusion that can exclude claims that arise from the failure of a financial institution or suspended fund.
- Does the policy allow Inadvertent Non-Disclosure protection? This guards against insurers exercising their right to avoid the policy in the event of an inadvertent, material non-disclosure, misrepresentation of facts or untrue statement.
- Is there an extended reporting period for claims/circumstances? This is a clause that obliges insurers to accept notice of circumstances during a limited period of time after expiry of the policy, provided that the matter being notified first came to your attention during the period of the policy.
- The importance of ‘May’ vs ‘Likely’. You must be familiar with and understand the implications of all aspects of your policy wording, specifically in relation to the notification of circumstances/claims. The words ‘May’ and ‘Likely’ are especially important in this regard – they make a huge difference when insurers decide whether to accept or reject a claim. If you are not clear on the implications get in touch with us on 0345 251 4000 for a clear explanation.
What level of professional indemnity insurance cover is required?
Unlike other professions, such as solicitors and surveyors, the FCA does not enforce a standard wording for financial advisers, more commonly known as ‘minimum terms’. As a result, the levels of coverage offered by insurers vary widely.
There are, however, more general rules governing professional indemnity for financial advisers. These include rules relating to the limit of indemnity and excess levels.
The FCA requires all firms to carry a specified minimum level of indemnity for both a single claim and aggregate claims per year. Firms that fall under the Insurance Mediation Directive, the current minimum levels are set out in euros:
• €1.12m (or £806,199) for each and every claim, and
• €1.68m (or £1.21m) for claims in the aggregate.
These minimum levels are based upon a firm’s “relevant income”. Where that relevant income is in excess of £6m firms will, in the majority of cases, be subject to higher minimum limits of indemnity.
FCA regulation allows financial advisers to carry an excess at any level they like, but those levels are usually dictated by the insurer. Where an excess exceeds £ 5,000 for a particular product, or across the board, the firm will need to hold “additional own funds”.
If you want to offer your services in the European Economic Area (EEA) then there are further requirements regarding the limit of indemnity or capital adequacy. Contact us 0345 251 4000 for further details.
Trading without adequate professional indemnity insurance
This represents a serious breach of the regulatory requirements and firms will be closed down if they cannot show they have fully compliant cover and are operating within all the rules.
Because of the historical problems surrounding the industry, it is highly regulated and insurance cover has become more restrictive and expensive. Given this, we cannot over-emphasise the importance of maintaining robust internal risk management systems, ensuring you have a good risk profile and getting expert advice from a specialist broker. It’s also important to begin your renewal process in good time. As the market tightens you may be faced with higher premiums and less favourable terms – so don’t put yourself in the position of having to accept a policy you are not happy with simply because you’ve left it too late to explore alternatives.
Obtaining your quotation
For a general chat, some free advice, or for a competitive professional indemnity insurance quotation, please contact us on 0345 251 4000 or email firstname.lastname@example.org
This guidance note is intended for information purposes only. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. This guidance note shall not be reproduced in any form without our prior permission. © 2018 Professional Indemnity Insurance Brokers Ltd