From Adviser Guide: Getting Professional Indemnity Insurance
Q: What affects my PII premium?
Each insurer calculates risks differently but they will all look at areas of a firm’s business when calculating the premium.
As a whole, the section of the insurance market that provides professional indemnity insurance to financial advisers has not has the smoothest of times in recent years and has hardened considerably. This means all firms, however they have performed, are being affected the same.
The Hutton pensions review and the Keydata and Arch Cru collapses have combined to create a tough market for insurers and, even though your firm may have no direct link to them, these issues become so expensive for insurers that it impacts the entire market and squeezes premiums upwards.
But down at the micro level, there are many aspects of individual firms that insurers will consider. Of course each insurer calculates risks differently but broadly they will all look at areas of an authorised firm’s business when calculating the premium: turnover, required limit of indemnity and level of excess, risk profile of the business, and the nature of the business.
A larger turnover tends to be reflected in the premium, agrees Teresa Brewer, Sales and Services Director, Aon UK. “Some insurers may look at the past five years’ turnover to consider any spikes or trends in your income. It is best to focus on the rate against fees as a better barometer of cost – premium divided by fee income.”
She adds that there are a number of factors that make a firm a more attractive risk for an insurer.
• Split of business – some areas of work will pose a higher risk to insurers than others. “The split of a business should mirror the expertise of the firm. For example if there is a small percentage for a specific area, the insurer will want some comfort that the firm has the relevant experience to undertake the work.”
• Regulation and compliance – insurers will consider the FSA metrics of a firm to measure compliance such as how many cases are reviewed, the ratio of clients to staff, and so on.
• Complaints history – your firm’s complaints log will show the frequency of claims and what type of complaints have been made. “If there are trends, insurers will require clarification as to why and what actions have been taken to prevent future claims.”
• Quality of personnel – the job experience of fee-earning employees in a firm and how the corporate structure works is a key consideration. Insurers will require an understanding of experience, training and areas of expertise of key personnel.
• Your products and services – “What are the firm’s unique selling points to clients, and what type of service do they offer? Firms can range from being dependant on marketing financial promotions to a wide audience, to specialising in niche products therefore the insurer will look to understand the firm’s culture and consider the risks each model presents,” points out Ms Brewer.
• Claims history – this is an important factor for any firm, s/he adds. “What a good claims history looks like will dovetail into a number of other considerations, particularly around the actions that have been taken to avoid a repeat. Notifications and complaints should always be declared/notified to insurers and is not always necessarily viewed negatively. If notifications/complaints are not notified this could invalidate the policy.”