We review the current PI insurance crisis facing the financial services sector...
Since the 1980s, professional indemnity insurance has been compulsory for all Financial Advisers and it's been the source of much controversy ever since.
Over recent years financial services has generated more professional indemnity insurance claims than most other professions. The sector has found itself mired in significant instances of mis-selling and on top of this IFAs and their Insurers now face the escalating level of risk uncertainty associated with DB Pensions Transfers.
In recent years, many IFA firms found themselves unable to obtain compliant PI insurance because of exposure to UCIS products and fund insolvency and today many firms will now carry policy exclusions against these risks.
This may seem harsh, but it was done mainly because PI insurers see themselves as providers of insurance for ‘professional negligence’ rather than as a ‘compensation provider’ for mis-selling or funds and product providers which become insolvent. Excluding those risks which seemed to be emerging as a by-product of regulator involvement, made the exposures more certain and more manageable, from an underwriting perspective.
More recently, things were just beginning to settle down and insurer confidence was returning to the IFA market, when along came the British Steel cases highlighting the potential exposures arising from DBPT.
So here we go again!
Defined Benefits Pension Transfers and the PI market
Based on its past experience, this issue has been taken very seriously by the PI market. It didn’t take long before questions were being asked by underwriters about the potential exposures their policyholders had to DBPTs. And of course we’ve also seen the recent significant rise in the FOS awards which has added hugely to the market’s caution.
It all comes at a time when the PI insurance market is hardening with rate increases in other areas (Construction, Legal, Accountancy) and Insurers can now afford to focus on those areas they really want to insure and move out of areas where they are less comfortable.
So those insurers with an appetite for IFAs face less competition, which enables them to increase premiums and reduce cover, particularly for higher risk cases.
As a result, there are even fewer insurers active in the market today and if you are an IFA with exposure to DBPT the chances of obtaining an alternative quotation are almost zero. Indeed, market leaders Liberty Mutual recently announced they are no longer offering cover for DBPT on new business quotations. They are doing this to minimise and to manage the exposure and also give their underwriters time to focus their efforts on correctly underwriting their existing policyholders. To some this stance may seem like a negative step, but it is done in the longer-term best interests and stability of the market.
As I see it, the market is going through an extended period of adjustment. IFAs are now arguably the most highly regulated of all mainstream professions and if the mis-selling issues are eradicated, you are left with an attractive profession to insure. The question is ‘how long will the adjustment period last?’.
What you can do about it
The market is ‘a market’ and you can only buy the cover the market will offer you. Policy exclusions are now standard with most Insurers and they won’t shift on those exclusions. It’s ‘take it or leave it’.
That said, the premium and other aspects of the cover are still negotiable if you understand how the quotation process works….
The proposal form completed at renewal every year is a representation of the quality of an IFA’s business to the insurance market. This is very much ‘hands-on’ underwriting and a good underwriter in high-demand is more likely to spend their precious time reading an attractive submission.
It's worth investing some time making sure your submission looks professional. An underwriter will judge a firm based on the completed form and they will also view the firm’s website and perhaps the available financial information online.
Engage with your broker. They are doing the work on your behalf and they will work harder for you where there is a good working relationship and if you can make their job easier.
It’s the IFAs who spend some time in putting together a quality presentation for the insurance markets who will get the best reaction.
So this is a sellers-market and those IFA firms whose quotation requests are poorly put together simply end up in the ‘no quote’ pile, or at best will pay the highest premiums.
Article by Mark Bracher of Professional Indemnity Insurance Brokers Ltd and published by Citywire