Networks that offer members discounts on PI premiums through captive insurers are facing a “double-edged sword” as if their advisers are subject to a high level of claims it could significantly affect profitability, according to a senior executive at Positive Solutions.
Richard Pearson, chief operating officer at the Aegon-owned network, said that having an insurance subsidiary to underwrite claims could prove costly, though he emphasised that it is unlikely to pose an existential threat.
Last week, Tenet announced that as professional indemnity insurance premiums are going to increase, it is offering advisers who have a Statement of Professional Standing a 50 per cent reduction in their professional indemnity insurance excess on claims relating to advice.
Keith Richards, group distribution and development director, said that this is possible due to Tenet’s Guernsey-based subsidiary Paragon Insurance.
Speaking in the wake of the announcement, Mr Pearson said: “My experience of PI is it depends on how well you manage risk within your business. If you have an insurance subsidiary that underwrites PI insurance and it gets lots of claims, it can end up making a loss if it goes badly.
“PI premiums depend on three key drivers to quantify the cost of PI insurance - claims experience, risk management and the PI market in itself, as it goes through peaks and troughs.
“If they go through a period of lots of claims, this could have an adverse affect, however it would have to be something quite significant to take them [network] down but this move could affect their balance sheet and profit.”
Other networks also warned over potential commercial implications as they confirmed they would not follow suit with the launch of captive insurers to offer similar discounts.
Steve Young, commercial director at Sense, said: “As Sense has already been offered terms for 2013 identical to those we enjoy in 2012, we have no plans to establish our own captive PI insurer.
“We wouldn’t launch our own captive insurer because it would not allow us to offset risk effectively. If a wholly owned captive insurer were to experience very heavy claims, then the resulting losses could endanger the future of the network.”
Philip Martin, proposition and marketing director of Openwork, added that he did not believe that Tenet was getting any advantage by offering this but did say that the “network is essentially insuring itself”.
