Arch Cru £100m claims could triple PI premiums
Professional indemnity insurance specialist warns underwriters will need to make their money back if they are liable to pay out £100m in Arch Cru claims.
Premiums for professional indemnity insurance for IFAs could triple if the £100m Arch Cru consumer redress launched by the regulator is met, Neil Pointon, director of Howden Insurance Brokers, told FTAdviser.
On Monday (30 April) the Financial Services Authority announced it has launched a three-month consultation on establishing a consumer redress scheme for Arch Cru investors, which could deliver more than £100m compensation to those deemed to have been mis-sold the funds.
The proposed redress scheme is in addition to the £54m payment scheme announced last year, involving Capita Financial Managers Limited, BNY Mellon and HSBC.
The regulator said it has gathered evidence which indicates widespread mis-selling of the CF Arch Cru Investment and Diversified funds.
These were high-risk funds, sold unsuitably as low or medium risk, leading to significant consumer detriment, the regulator said.
Neil Pointon, director of Howden Insurance Brokers, warned if the regulator was “correct” and the redress scheme of £100m was met, underwriters were liable for that and “quite clearly” it would mean underwriters would have to reprice policies going forward.
He said: “Insurers will need to make that money back, any other money and a profit of course but the premium would need to more than double, in fact it would treble for just this one instance, of course.
“And there could be other claims that come in such as Keydata or something else, and this could further increase the multiple by which advisers would need to increase their premiums.”
However, due to several potential policy exclusions such as specific Arch Cru exclusions, exclusions if a business review is carried and others, he said it was “questionable” as to how much of the £100m would fall for underwriters to pay.
Mr Pointon pointed out insurers would not become insolvent because of this as PI providers also do other forms of PI insurance for other professions.
He said: “I don’t think it is an issue that they won’t be able to afford it but this could have as damaging consequences on insurers as the pensions review did have on product providers.”
A further worry for IFAs is the excess cost of their insurance, which is always per claimant.
Julia Norris, senior associate at law firm Pannone, warned the redress scheme could lead to IFAs becoming insolvent.
She said: “If the IFAs had to pay a £5,000 excess for each of the 20,000 Arch Cru investors then this would lead to a £100m cost to the IFA industry. The position will be far worse if the PII cover does not apply.
“IFAs are required by the FSA to ensure that they have adequate insurance cover and retain adequate capital reserves.
“How many IFAs may already be in breach of this is unknown? For many IFAs they are only recently discovering they were unwittingly in breach of these requirements following the insertion of (for example) an insolvency exclusion clause into their policies by their insurance providers.”
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