What’s going on with professional indemnity cover, and what could the future bring?
Ask any random selection of financial advisers what irks them the most in their business, and professional indemnity insurance (PII) is fairly certain to feature in their top three pet peeves – if not the number one gripe.
Why? For several reasons, the main one being that firms aren’t permitted to operate without PII, yet they have no idea what it will cost from year to year.
Firms are not even sure if they’ll be able to secure the cover easily enough at renewal time.
There are some uncomfortable factors permeating PII provision that explain the difficulty for many advice firms.
Advisers would establish an insurance scheme that would provide cover only for well-run firms.For one, the number of providers has been steadily shrinking over recent years, as various insurers have opted to exit the professional advice sector owing to concerns about uncertain risks.
There may be quite a few brokers active in the IFA market, but in truth they can only approach a small cluster of willing insurers.
This reduced competition among providers inevitably blunts their interest in offering ‘attractive’ premiums.
Then there’s the justifiable angst that everyone in professional advice ends up paying higher premiums when chunky insurance payouts are triggered.
This is as a result of the behaviour of a few bad actors in the sector found to have run their business poorly or treated their clients unfairly.
Who likes unpredictable business costs?
At a time when it’s more important than ever to plan ahead for the costs of doing business, from office rents to staff salaries and management systems to adviser tools, it’s more than awkward to have little foreknowledge of the price of the next PII premium at renewal.
This situation can prevail for year after year. For the advice firm, having to endure this instability in PII costs is a persistent headache without relief.
Now, let’s imagine for a moment advisers are offered the opportunity to obtain some pixie dust, which they could sprinkle any way they wish to solve the problem of PII cover.
The queue would go out the door and into the next street.
We don’t need magical thinking to guess advisers would establish an insurance scheme that would provide cover only for well-run firms – those with the right processes in place to bring good outcomes for their clients.
Who will come up with a sound and sustainable way to moderate and safeguard good businesses?They would thereby be sheltered from paying hiked premiums emanating from the slip-ups or outright bad conduct of outliers, because those poor performers would be left outside the circle of trust.
And importantly, trusted firms’ premiums would be quite stable year on year, because the risk-covering insurer is as happy as the low-risk firms that this is the right way to go.
Something’s got to give.
Switch back to reality and it’s clear current provision is miles away from this ideal scenario. So what’s to be done?
A major shakeup in the PII market is certainly overdue.
The pressing issue is clear to me. Who will step away from the existing unsatisfactory model, and come up with a sound and sustainable way to moderate and safeguard the insurance costs of good, properly run advice businesses?
Who will create something that protects them from the excesses of those who sail close to the wind when servicing clients?
All eyes are on what comes next with PII.
Sooner would be better than later, if we want to ensure the long-term health of the majority of advice firms who do it well in the way they look after their clients’ interests.
Tom Ham is director of Calton Wealth Management
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