As we all know the professional indemnity insurance market for financial advisers has hardened in recent months, due to a number of high profile insurers withdrawing due to poorly performing accounts.
With so few insurers now competing in the sector, there is less competition. In turn this has allowed the remaining insurers to increase their rates and return to profitability following heavy underwriting losses in previous years.
Generally these insurers are now demanding more information and exercising further caution if a firm offers advice in more high risk areas.
Having said that, by following my tips below, advisers can significantly improve their chances of obtaining competitive PI and reduce their chances of seeing their premium increase.
1. Start early
Every business is different and a number of factors can determine the premium which a financial adviser is being quoted.
Contributing factors may include:
• the firm’s fee income;
• risk profile i.e. types of products/investments they are advising on;
• claims history;
• experience and qualifications; and
• the level of risk management procedures the firm has in place.
Underwriters may also operate with different risk appetites where they adopt different rating structures, targeting certain types of firms.
With that in mind, if an adviser is looking to review the market and give themselves the best possible chance of obtaining the widest cover at the most competitive rates, the key is to start the process early. This could be up to three or four months before the renewal date.
By starting the process early, it will also allow you and your broker more time to prepare a comprehensive and detailed application for the underwriter’s judgement. You will also have more time to negotiate the terms and reduce the chances of the terms being left until the last minute.
The terms and conditions being quoted by the various insurers can vary, so giving yourself plenty of time will allow you to fully understand the coverage, so you are not basing your decision solely on price.
2. Create the right impression
This means completing the forms accurately and neatly. Providing additional information can also help your insurer/broker better understand your risk. For example, supporting your proposal form with copies of your terms of business, complaints register, investment proposition document and CV can really help.
If you have had previous claims, provide an additional summary of what has happened, the amount of the claim and what the firm has done to prevent re-occurrence.
3. Demonstrate risk management procedures and policies .
If you have recently updated these documents and/or feel your firm has in recent months done more to reduce the chances of a claim occurring, provide further evidence of this. Underwriters get inundated with applications so to improve your chances of obtaining the best PI, make sure your firms proposal form stands out.
4. Go through a broker
I would say this, wouldn’t I? But generally PI is always best brought through a specialist who can be found on the FCA list of approved PI brokers. There are also a number of managing general agents who act as both agent for the ‘insurer’ and the ‘insured’.
Working with an ‘independent’ broker will allow you to carry out a full review of the market, obtaining quotes and negotiating with the panel of insurers available to them. In the event of a claim, a broker can also provide additional claims management support, further negotiating with your insurer if needs be.
The number of insurers available to an adviser is limited, so try and avoid a situation where you send a blanket proposal form to every broker which approaches you. This not only slows down the quoting process, but often it means the same insurers see the same proposal form, but through multiple brokers.
Generally a maximum of two brokers should be able to review the whole market for you.
5. Meet with insurers
In the majority of cases, the broker will act as the agent of the insured, representing their interests in the marketplace. This means they will usually carry out all the negotiations on their behalf.
However, in certain circumstances many underwriters welcome the opportunity to meet with their policyholders. This will give the adviser an opportunity to ask their insurer any questions, allow them to get to know their underwriter and improve their insurers’ understanding about their business.
6. Understand exclusions
The exclusions will very much depend on the insurers’ IFA wording and the terms that are agreed and/or quoted to the individual firm. A copy of the policy wording will detail all of the insurers’ standard policy terms, conditions and exclusions.
IFA wordings do vary between insurers so it is important to check and understand the different options available to the firm.
It is often the case that non-standard exclusions are also being applied. In recent years, common additional exclusions include Arch Cru, Key Data, Matrix and unregulated collective investment schemes.
Some insurers also apply insolvency exclusions but the definitions of these wordings do differ between insurers. It is important to always check and fully understand these definitions from the outset.
Good luck!
Tom Simcox is principal of Simcox Brokers