Over the past five years the professional indemnity insurance market has seen a general trend of rising claims against financial advisers. Increased regulatory scrutiny, with no back-stop to retrospective action, continues to unearth difficulties relating to advice, sometimes provided many years ago.
Arch Cru funds, unregulated collective investment schemes and defined benefit pension transfers – the list of allegedly mis-sold products is seemingly endless, as are the resultant PI claims against financial advisers.
While the FCA’s commitment in its 2014/15 business plan to revisit rules on how long clients have to take a complaint to Fos is welcomed, financial advice continues to produce a significant volume of PI claims. This has unsurprisingly resulted in an equally significant reduction in the number of PI insurers who are prepared to insure the profession.
Unfortunately, the implementation of the retail distribution review, while well received by insurers, has not led to a discernible change in underwriting attitude, as insurers are still dealing with a huge number of claims that arose prior to the RDR. In short, the RDR will need to demonstrate its merits, as evidenced by a reduction in claims, before it results in improved insurer confidence.
As the range of insurers willing to underwrite PI for financial advisers has reduced, so too has competition, allowing those insurers who continue to provide cover to use the opportunity created by reduced competition to increase their insurance rates to try to offset the losses caused by claims. In essence, the laws of supply and demand prevail, and many firms will find the cost of their PI insurance has increased significantly in recent years.
The situation is made worse when insurers also seek to increase excesses and/or restrict the level of cover by, for example:
• Product-specific exclusions relating to those products which are known to cause a high level of claims, for example defined benefit pension transfers.
• Including defence costs within the limit of indemnity – which will actually reduce the sum available to settle any claims.
• Including an insolvency or failed fund exclusion – this exclusion is present in numerous policies and can exclude claims that arise from the failure of a financial institution or suspended fund such as Keydata, Brandeaux and Arch Cru. The extent of these exclusions can vary greatly.
Given the trend for reductions in breadth of cover it is vitally important that firms seeking renewal terms take time to complete the proposal form accurately. Unintentional inaccuracies in response to questions relating to past and present business activities are common. This may result in a firm either receiving inappropriate cover or insurers rightfully rejecting a claim, leaving a firm to cover any losses arising from their balance sheet.
In advance of accepting a quotation, firms must take time to read their policy wording in order to understand precisely what they are being covered for and, more importantly, what they are not being covered for. Firms should not simply assume that the cover being offered will remain unchanged from the previous year, particularly if they have changed their broker and/or insurer. It is also very important that time is invested in understanding the precise steps that should be followed when notifying a claim or change in circumstance. As highlighted above, these can vary from policy to policy, and failure to adhere to the process may result in insurers rejecting a claim.
While it is understandable that firms may feel powerless in the face of an unfavourable response from an insurer, there are steps businesses can take to reduce the challenges associated with a PI renewal. These steps range from firms ensuring they stay informed about PI insurance market conditions throughout the year, to starting the renewal process at least eight weeks in advance of renewal, through to ensuring the submission of a comprehensive, tidy and accurate proposal form.
Most importantly, however, firms must continue to focus on improving their approach to risk management and ensuring that, at PI renewal, they can show the results of that commitment. While insurers understand that few financial advice firms have been lucky enough to come through the last four years completely claims-free, they will expect businesses to explain how they have learned from past mistakes and demonstrate how those lessons have been translated into improvements to risk management.
One of the ways that firms can achieve this is by using the services of a specialist compliance provider. Those firms that do so may find that insurers are rather more willing to recognise their commitment to risk management, as they will be able to attest to the benefit they have received from the systems, processes and insight that comes from working with a large, specialist organisation.
Some of these specialist compliance providers have appointed PI insurance brokers, with which they have developed close working relationships over many years. This has enabled these compliance providers to develop a detailed understanding of why claims occur, which has in turn enabled them to use that knowledge to tailor risk management procedures accordingly.
Insurance brokers who work with a number of compliance providers believe that this process is pivotal to providing insurers with additional comfort and reassurance about the commitment of member-firms to proactively prevent claims occurring. It also enables PI insurance brokers to deploy the collective buying power of multiple firms to negotiate better premiums and provide broader policy coverage.
For some firms the availability of robust and high-quality PI insurance facilities developed in this way has been critical to long-term success, given previous difficulties they have encountered in obtaining cover in the open market.
In one particular instance I was made aware of a firm that had been an appointed representative of a financial advice network, but had left to become directly authorised by the FCA. While the firm’s past liabilities continued to be covered by the predecessor network, insurers were not sufficiently comfortable with their historic claims experience or the firm’s procedures and systems to offer cover.
However, the firm secured the services of a specialist compliance provider who was able to undertake a detailed risk management audit, reviewing areas such as training and competence procedures, accounts and financial promotions. This review led to a series of recommendations regarding risk management improvements.
This wise move by the firm in question, and their commitment to act upon the recommendations arising from the audit, resulted in the PI insurance broker securing valuable cover for the business.
Elaine Parkes is senior sales manager at support services provider Bankhall, part of the Sesame Bankhall Group
Key Points
Over the last five years the professional indemnity insurance market has seen a general trend of rising claims against financial advisers.
In advance of accepting a quotation, firms must take time to read their policy wording.
The availability of robust and high-quality PI insurance facilities has been critical to long-term success.
