Advisers and market insiders have warned a growing number of restrictions being placed on professional indemnity insurance policies often including whole ‘genres’ of business could force many advisers to forfeit their independent status.
Research published today by the Association of Professional Financial Advisers revealed 31 per cent of 271 advisers surveyed by NMG Consulting have seen their premium increase, by around 14 per cent on average.
Around 44 per cent of advisers have received the same premium as last year, and only 8 per cent have been offered a reduced premium, the data show.
Ian Osang, IFA at Ingard Independent Financial Management, told FTAdviser his firm’s premium had jumped 20 per cent in two years, but that this was “not unreasonable” as peers “have seen rates more than double”.
Speaking to FTAdviser, chartered financial adviser Phil Billingham, founder of adviser support services consultancy the Phil Billingham Partnership, said that he has seen the PI market ‘hardening’ in terms of both higher premiums and excesses.
He added that he is seeing policies that include a broader range of restrictions than previously and even wholesale exclusions covering entire business areas.
In particular, he cited anecdotal evidence from peers suggesting PI insurers are now looking at in more detail at drawdown and are increasingly refusing to cover firms with a large legacy of pension transfer business.
The FCA has been cracking down on transfers to self-invested pensions involving esoteric investments, issuing a major fine and a sector-wide alert in the past two weeks, while Sesame admitted losses doubled in 2013 in part due a redress provison in relation to pension transfers.
A likely surge in drawdown business in the wake of the Budget has also been cited as a potential area of concern by advisers who claim the regulator considers the product too high risk and not suitable for most clients.
Mr Billingham said some firms who cannot get cover for certain genres are becoming restricted “as they are not prepared to take the commercial risk themselves”.
He said: “I have seen a number of firms with pension transfers who cannot get cover - anything that looks risky – VCTs, EIS, pension transfers even through [personal pension plan] transfers.
“This is now spreading to drawdown. It’s not that advisers can’t get cover for drawdown but excesses have increased and so have premiums - large premiums or large excesses for that kind of business.
“It’s in that high-risk cluster, so my concern is if that approach continues and PI providers are looking back retrospectively... an overwhelming majority of business will be high risk because of drawdown as the Budget changes suggest that this will be a bigger market.”
A PI expert, who declined to be named, said his own firm was not excluding whole business areas but that where this happened it would likely lead to advisers opting to become restricted.
He said: “There are no standard exclusions within our terms of business but if investment products out there have failed such as Arch Cru and Keydata then there will be specific exclusions.
“If you have restrictions [from your PI insurer] which prevent you from carrying out activities, then it could lend itself [as a reason for an adviser] to go down the restricted route.”
A FCA spokesperson said exclusions to cover would not force a firm to become restricted if they were prepared to hold extra capital to cover these business areas that are not insured.
The spokesperson said: “Having exclusions to your professional indemnity insurance does not, by itself, mean that you are not ‘independent’.
“This is because firms can hold extra capital to cover any exclusions which may be necessary to ensure that the firm is still willing and able to advise on the whole of the retail investment product market.”
Chris Hannant, director general of Apfa, said the findings further highlight the need for a long-stop for advisers.
He said: “These findings offer further evidence of a hardening insurance market for advisers, driven by a compensation culture and the legacy of events like Arch Cru, Keydata and Catalyst.
“They also highlight further the need for a long-stop for advisers. Without one, the liabilities of companies have no limit, and therefore when insurers calculate risk it is open-ended – which drives premiums up.
“The FCA has said that it plans to consider the case for a 15-year long-stop on complaints to the Financial Ombudsman Service for personal investment firms during the next twelve months. This is something we’ve long campaigned for and would be a huge step forward for the industry.”
