It was not many years ago when, despite it being a regulatory requirement for a financial adviser to have PI insurance, it became virtually impossible for anyone to obtain cover at a reasonable premium.
Indeed, for all intents and purposes, the PI market shut down for the intermediary sector. Such was the crisis that the then regulator, the FSA, turned a blind eye to the fact that over a thousand firms were trading without PI insurance.
Clearly, this is not a situation we want to see again, yet all the signs show we are charging headlong into exactly that, unless we can bring some pragmatism into the market.
The point which has to be grasped by the regulator is that insurance underwriters simply employ their capital in the areas of business where they can calculate the risks and where, ultimately, they can be reasonably confident of making a profit.
Of course, insurance is about risk, but specifically it is about ‘calculated risk’ and this applies whether they are insuring young drivers, trapeze artists or financial advisers.
If an activity is unknown because they cannot get the data, or it is a new hazard where no reliable data exists, underwriters’ course of action is to assume the worst and price that into the premium.
If there are too many unknowns and they cannot sensibly price the risks, they will simply withdraw their capital from that part of the market. This is what happened when they pulled out of the financial intermediary sector a few years ago.
Pension freedoms’ new and unquantifiable risks are emerging from the poorly considered rules.
It is fairly clear a minority of advisers have exposed themselves and the sector to claims through poor advice.
Unsurprisingly therefore, the regulator is belatedly focusing on where bad advice may have been given, and bringing the culprits to book.
Finally, under the new Financial Services Compensation Scheme funding proposals, the FCA has suggested that PI insurers should be, in essence, forced to extend their risk coverage.
Is there any wonder then that PI premiums are going through the roof and insurers are talking of pulling out of the market?
I believe the regulator, the profession and the PI insurers need to have a frank discussion and bring some common sense to the situation before it becomes untenable, yet again.
Ken Davy is chairman of SimplyBiz