Most of the specialist insurers contacted by FTAdviser declined to comment on the regulator’s plans to examine the sector as part of its review into the Financial Services Compensation Scheme levy.
But Paul Barnes, director of Hoyl Underwriting Management, said its review was overdue.
“Many providers have pulled out because of losses and those few who have remained have been responsible for rising excesses and just as importantly increasing use of exceptions to keep premiums ‘acceptable’.
“Adviser firms are struggling more and more to find suitable cover at an affordable price,” he stated. “We welcome the FCA’s initiative to turn the spotlight on this fundamental yet increasingly costly service.”
Duncan Philpott, executive director of Willis Towers Watson, said the issue is caused by the increasing numbers of claims being made against IFAs.
He said: “This class has cost insurers a lot of money which is why there is a limited number of insurers in the market. With supply and demand, if there is a limited number of insurers the price goes up.
“The number and level of ombudsman awards has been going up and as a result insurers are having to pay out more money.
“Insurers are nervous about potential future losses arising with the pension liberalisation and they are trying to mitigage their potential losses early.”
He said that if the FCA capped the level of excesses it could be a “doomsday scenario” because insurers could leave the market.
Last month the National Audit Office published a report into the redress process, which found there were concerns at the FSCS about inadequate PI insurance being an important reason why it is unable to recover more.
The report said some insurance contracts explicitly disallow payments to the FSCS in the event of failure.
Caroline Bradley, group finance director at Tenet, said her company offers PI run off cover to its network firms so that their liabilities are covered into the future and advisers have peace of mind in their retirement.
She said: “We believe it should be an FCA requirement that all directly authorised firms should similarly continue with PI cover for a number of years after they have ceased trading to avoid claims ending up with the FSCS, which is currently funded by a diminishing pool of advisers.”
The FCA has said it will be reviewing the FSCS levy over the course of this year, with particular attention being paid to its impact on IFAs.
Collegiate, Howden, QBE and Brunel were all asked to comment, but either declined to do so or failed to respond.