One of the main concerns currently facing financial advisers is the dysfunctional nature of the professional indemnity insurance market. Numerous complaints have surfaced about rapidly changing terms and premiums and the fact that an increasing number are either no longer able to obtain cover, or are being forced to pay an extortionate amount for a policy with extensive exclusions.
These difficulties have not been helped by the significant financial failures of Keydata and Arch Cru, and were brewing back when adviser network, Honister, blamed its insolvency on high PII costs in 2012. But, according to many, this year in particular has seen premiums increase substantially. and even more previously approved products make the black list.
Kevin Moss, the director of Cardiff-based ValidPath, claimed that despite few complaints and years of trying to appease PI underwriters, his business is paying 54 per cent more for cover in 2014. PI underwriters, he added, were “more wary” of networks than individual advice firms because of past high-profile failures, and his business was being punished for that despite demonstrating its responsible nature.
Risk
He agreed that underwriters had to take a certain “view of things”, but was surprised that his company’s efforts to mitigate risk seemed to have had no impact on the terms of cover it got and were instead reflective of the whole marketplace.
“In the 12 years I have been running this firm we have had 17 complaints, of which six resulted in some sort of redress being paid,” he added. “We have only had three claims that resulted in a claim against PI cover.
“You would not have expected then that this year we are paying 54 per cent more for less cover. We do not do anything new without running it by our PI people. We are very far from gung-ho. PI insurers keep changing the goalposts. It goes up each year, which we would expect as our turnover has increased. But those increases were modest. This year, however, it was a huge jump.”
Planning ahead
According to Mr Moss, it is impossible to plan ahead when the terms of cover are constantly changing. Using an example from a few years ago when one of ValidPath’s appointed representatives were approved to do business with a Ucis – before they were banned by the regulator – he said that now that cover was gone it was completely
liable.
“The way the market operates on a year-to-year basis means we never know what is available to cover, which makes it difficult to plan ahead,” he added. “The cover you have is only subject to the terms you have in that year.”
As a relatively new business, Phil Billingham, founder of the London-based Phil Billingham Partnership, said his firm’s PI cover was “cheap” and easy to manage.
He raised concerns, however, that several good firms were now struggling to get cover, and blamed this worrying situation on there being too few providers in the market.
“Most current insurers are not looking to expand their books, so if your insurer drops out of the market or you want to shop around you will have problems. There is very little capacity in the market,” he added.
With these problems seemingly not going away, Mr Billingham urged his peers to look very carefully at their due diligence processes and to filter out anything that appears inappropriate. When firms are forced to close because they cannot get cover other advisers are constrained to pay through the levy or higher PI premiums, which is why he claimed it was in everybody’s best interests to reduce risk and simplify operations.
Uncompetitive
Alex Morley, chief executive of Sanlam Wealth Planning, made similar observations on the uncompetitiveness of a market with just “two or three” providers left, and the importance of smaller, less wealthy firms avoiding riskier products.
As many of these smaller businesses do not have the means to self insure, he predicted that most will either switch to networks or become insolvent. Furthermore, because of an increasing number of restrictions on policies, he warned that a lot of IFAs would be forced to register as restricted.
“If a firm does not have the means to self-insure, and not many will have, what we saw with Honister could be repeated on a large scale,” he said. “It will drive companies into networks, or you will see these over escalated costs. Plus the FCA fees have shot up, and all of this will be paid for by the consumer.
“If you do not have the means to self-insure you need to rely on a third party. What is so independent about that? If your insurer will not cover you for certain things, you are forced to become restricted. There is a probability that firms that represent a higher risk, those established for a while, will see premiums go up to a level that is very uncomfortable.”
Legal advice
But not only financial advisers are concerned by these developments. Philippa Hann, a partner at law firm Clarke Willmott, said she is writing to the FCA to point out the “devastating effect” of “inadequate insurance”.
“I have been instructed both by advisers to fight their insurers over the terms of the insurance cover, and by customers of advisers who have received bad advice, only to find that the insurance is inadequate to meet the liability,” she said.
“Those clients are left in an unenviable position of only being able to pursue their claim against a defunct company or to bankrupt the poor adviser. In either scenario there are no winners,” she added.
Scapegoat
While the obvious scapegoat in this scenario are the insurers, Mark Bracher, managing director of Professional Indemnity, defended the work of his peers and claimed that the issues were caused by uncontrollable supply and demand issues. Because advisers work in an industry where claims are common, he said that PI underwriters saw IFAs as a “high insurance risk”, which meant that few remained in the sector, and those who did remain restricted their cover and increased premiums.
“Insurance companies take an informed view on whether there is sufficient industry income to cover industry claims,” he added. “In the case of IFAs, most take the view that there is not and therefore choose not to insure IFAs. This enables the few insurers who do participate to restrict their cover and increase premiums.
“This may seem unfair but it is simply supply and demand and if they could not take this action they might also exit the market. It is vitally important that the PI insurers can make money from the IFA market, or else there is no market.”
Mr Bracher, however, was more upbeat on the future, particularly as many of the problems that had been generating claims were now “blowing over”.
After a period of recession, poor investment returns and scandals, he remained optimistic that more PI insurers could return to the market, which would bring more much needed competition.
Dysfunctional
In response to the claims from some advisers that the FCA should address the growing concerns of a dysfunctional PII market, a spokesman for the regulator said: “The level at which PII premiums are set is a commercial decision taken by insurers.
“PII is important because it provides additional financial resources from which firms can pay justified claims, and helps to prevent insolvency and excessive claims on the FSCS [Financial Services Compensation Scheme], which is funded by firms that are still trading.”
The spokesman also referred to page 25 of the FCA’s 2013/14 annual report, which included references to the action it took on varying the permissions of professional services companies, and agreements it made with others to better manage the issue.
Daniel Liberto is a former features writer of Financial Adviser
Key points
Many financial advisers are concerned about the rapidly changing environment for PI claims
Some predict that those who cannot self-insure will either switch to networks or become insolvent
Some claim that the regulator could do nothing to bring premiums down in a free market
