ProtectionFeb 24 2014

Trouble indemnity

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PII protects advisers and firms against client claims where advisers may have made a mistake or been negligent in their work, and helps firms maintain adequate financial resources - partly through helping to prevent insolvency. The requirement is set by the FCA, which expects a firm to always have a valid policy. As soon as a firm is authorised, it must have continuous cover.

A dwindling market

Bur brokers are reluctant to cover advisers, highlighting Arch Cru, Keydata, endowments and split capital investment trusts as some of the areas where there have been accusations of mis-selling.

“Insurers’ appetite has reduced significantly, primarily because it’s not just one-off negligence claims but industry-wide problems in the wake of mis-selling,” says Trevor Moss, director of insurance broker Brunel Professional Risks. “It’s an area where insurers are beginning to feel as if it is one crisis after another. Years ago we had the insurance market having to deal with a lot of losses coming from issues with endowment policies, and now it’s cases such as Arch Cru which have resulted in a lot of litigation.”

There has been a large amount of claims activity, which has made providers less likely to offer PII to advisers and, as supply has begun to dry up, prices have increased.

David Britner, broking manager at Manchester-based underwriters Towergate Lifestyle agrees. “It’s seen as a very, very risky business from an insurer point of view and the odds of a claim coming up are seen as being much more likely than other occupations,” he says.

One of the biggest problems in terms of costs adding up is that, even where an adviser is completely innocent, the defence costs incurred through legal proceedings to prove innocence are extremely high and are the insurer’s responsibility.

Risk and the RDR

One of the intended effects of the RDR was to make financial advisers a less risky group, with a broader knowledge base and tighter regulation. But this appears to be at odds with insurer after insurer leaving the adviser PII space and the cost of cover increasing.

For a post-RDR independent adviser, a policy must cover all retail investment products that clients may seek advice on, and if any product types are excluded on the terms of the policy, the company should hold additional capital as a form of insurance against claims in this area. It is important to make sure the cover applies to more ‘esoteric’ investments such as Ucis and ETFs. The sheer volume of product areas that a policy now has to cover - and some of those products being unregulated - is another reason insurers are often reticent to offer cover to advisers.

When it comes to PII, it seems that the RDR has so far been of little benefit and that advisers are not yet perceived as better qualified or less risky. Brokers say they have not seen a decrease in the number of claims over the past year. “The market has not got any better in the past 12 months, and in fact it has probably got worse,” says Mr Britner.

Mr Moss is more optimistic. “Any infrastructure put in place that reduces risk has to be good, but it takes a while for that to have an impact on the industry. There is still a lot of stuff washing around in the system from before the RDR that hasn’t manifested itself in losses yet,” Mr Moss says.

What to look for in a policy

The FCA’s minimum indemnity limits are denominated in euros, and are currently set at €1,120,200 (around £930,500) for a single claim and €1,680,300 (roughly £1,396,400) on aggregate per annum. The figures are set by the EU’s Insurance Mediation Directive which is why the amounts are quoted in euros. The aggregate or ‘series of claims’ clause - whereby two or more related claims are treated as a single claim for the purpose of the excess - has been particularly prominent in relation to Arch Cru claims. If an adviser’s PII policy includes ambiguous phrasing, for example ‘arising out of’ or ‘originating cause’, it could be possible to argue that only one excess should apply to all the claims surrounding Arch Cru and advisers should therefore not agree to multiple excesses until they have established what is necessary in line with their policy.

The regulator expects that advisers will notify their insurers as soon as possible that a claim may arise, although the actual requirements vary from insurer to insurer and will be specified in the policy documents.

When insurers are calculating premiums for businesses, they take into consideration the total income of the business, the required limit of indemnity and level of excess, the risk profile of the company and what the company does.

Some products may mean insurers are more cautious in agreeing to a policy, but that does not necessarily mean that insurers will not agree to quote. This decision is usually based on individual circumstances, and firms can provide insurers with information that may make the insurer feel more secure in agreeing to cover them. This could be proof of strong and consistent record-keeping or sufficient belief that claims will not come about in the future.

When making an application to insurers, it is important to highlight the company’s strengths and give clear and comprehensive information. As with all insurance, giving accurate information and disclosing everything that is relevant is essential. Failure to do so could mean the policy is invalid if a claim arises. It can be helpful to add extra information into the proposal about potential risk management issues such as evidence of assessments of competence and qualifications and a robust compliance system.

It is possible to negotiate a small-claims handling clause into the PII policy which would allow a company to settle or dismiss a claim without it needing to come to the attention of the PII insurer if it falls under the policy excess. In all cases, but especially in this case, a company taking out a policy should clarify with its insurer or broker what constitutes a notifiable event before agreeing to the policy.

According to the FCA, there are currently fewer than 60 insurers and brokers from whom advisers can purchase PII, although some brokers have said the list is out of date. The market for PII is small, with few insurers wanting to get involved with covering advisers. Mr Moss said in his experience there are now only two open-market insurers (Collegiate and Liberty) who look at new business with IFAs.

Sticky situation

It appears advisers have been pushed into a position where the regulator demands they are covered by PII, but the insurance industry is refusing to get involved. Limited availability from providers and a lack of competition leading to high prices means advisers are in something of a stranglehold.

It remains to be seen whether the RDR has the intended effect of decreasing risk among advisers, but if indemnity insurance prices are continuing to rise, it is hard to see where the IFA industry is reaping the benefits.