The Financial Conduct Authority’s proposals for the professional indemnity insurance market could lead to it contracting even further, according to those working in the sector.
One professional indemnity insurer insider pointed out there are currently only 10 active underwriters in the financial advice market compared with around 75 in other similar sectors, such as solicitors and architects.
The FCA is considering introducing mandatory terms for professional indemnity insurance in the financial advice sector, such as requirements to have run-off cover and restricted use of limitations.
This is part of the regulator's radical shake-up of how the Financial Services Compensation Scheme is funded to smooth the levy's cost for advisers.
It has acknowledged there are few providers in the market and some advice firms struggle to purchase appropriate cover.
But Julian Brincat, head of Protean Risk’s IFA practice, said: “Any decision about mandatory insurance terms requires substantial consideration as to the advantages and benefits for IFAs.
“On the face of it you might argue there are many benefits as it will make it easier for IFAs to consider alternative insurance terms.
“However, as has been shown in other markets, mandatory terms can have negative effects in terms of cost and competition for certain types of firm such as IFAs working in niche high risk areas.
“It is possible that it could lead to PI insurers leaving the market, especially if insurers are unable or unwilling to provide certain aspects of the mandatory cover.”
He also warned that if the wording was at a higher level than insurers currently offer it would probably be reflected in an increase in cost.
He said: “We have seen evidence of this in other sectors, such as in the solicitor’s professional indemnity insurance market, which has a mandated wording, where firms are rated higher than IFAs currently are.”
He also said a mandated wording might lead to some firms not being able to source terms at all and have to stop trading, including those that may have a particular risk profile that insurers would normally take a more bespoke underwriting approach on.
Tenet Group finance director Caroline Bradley echoed some of Mr Brincat’s concerns.
She said: “The introduction of mandatory terms for professional indemity insurance is likely to make premiums more expensive and could cause insurers to leave a market that is already quite restricted - we believe there are only currently about ten underwriters in our space, compared to approximately 75 in other sectors, such as solicitors or architects.
“We do support the proposed requirement to have run off cover and restricted use of limitations however, due to the fact that directly authorised firms can currently liquidate and claimants are ending up at the Financial Services Compensation Scheme.”
According to the FCA, the professional indemnity insurance market generates annual premiums of around £1.8bn but only around £50m of this is from financial advisers.
