Take cover

Advisers seeking out professional indemnity insurance (PII) over the past 12 months have witnessed a real mixed bag, affected largely by the discipline in which they operate. On the whole, premiums for mortgage brokers have increased while IFAs specialising in investments have faired somewhat better.

Recent scandals relating to payment protection insurance, mortgage affordability and valuations had no impact on the PII premiums of investment advisers in 2008 but IFAs should be aware that there is a new set of problems on the horizon.

Over the past year investment firms' premiums held up better than those of mortgage introducers, but PII brokers now believe that premiums will begin to increase because insurers themselves have been hit by the downturn. Like any other investor, insurers invest premiums to produce returns and, as a result, they too are vulnerable to the peaks and troughs of the market.

Worse still, new proposals from the Financial Services Authority (FSA) look set to add to the woes of intermediaries still further. In November, concerns were raised after the publication of a consultation paper that aimed to scrutinise the adequacy of the current PII cover levels. What followed was a series of proposals to increase the minimum capital requirement for potential future claims.

The FSA's 114 page consultation paper CP08 claimed that the introduction of these requirements would mean that authorised firms would be able to make higher redress payments, quicker.

It was even suggested that these requirements would reduce the number of payments coming directly from the Financial Services Compensation Scheme (FSCS) because fewer IFAs would be forced into insolvency. Unsurprisingly, the proposals have not been well received by some in the adviser community.

As if the spectre of higher premiums and new contingency rules were not enough, the regulator is also proposing a number of additional rules affecting liability insurance in retirement. The result is considerable anxiety about the future cost of PII.

Premium analysis

As far as the outlook for premiums is concerned, the news differs depending on the main business areas of each adviser. On the whole, PII brokers expect premiums in the financial advice sector to rise across the board for all intermediaries over the coming 12 months.

Patrick Bullen-Smith, managing director of London based PII brokerage Hera Indemnity, says that IFAs specialising in investment and pensions business will be least affected by the increases, although premiums are likely to edge upwards following last year's reduction. The prediction for firms transacting mortgage business, however, makes for more sombre reading.

Mortgage intermediaries that simply complete the bare minimum of information on their renewal sheets may find a significant increase in their cover, with specialists in the commercial, bridging or second charge market potentially finding a number of insurers unwilling to quote at all.