Financial advisers that renewed their professional indemnity (PI) insurance policies in the last six months have seen their premiums rise on average by 21 per cent, research has revealed.
The survey, conducted by NextWealth and Richard Parkin Consulting, polled 267 financial advisers.
Four out of 10 had renewed their PI policy.
FTAdviser reported last week that advisers performing a high volume of defined benefit (DB) pension transfers are having their level of PI insurance coverage reduced to £500,000, as insurers are wary of the risks involved in this type of business.
Previously, they would have the full limit of professional indemnity insurance cover without any restrictions, of £1.75m.
PI insurers are also asking advisers involved in the British Steel pension transfer scandal to to undergo an audit of their processes in order to get their policy renewed.
Despite the rise in PI premiums, 43 per cent of the respondents of the survey don’t expect the increase to have an impact on their business.
An equal number of advisers plan to increase fees or focus on higher value cases due to this hike.
Richard Parkin, previously head of pensions policy at Fidelity International and now an independent consultant, said recent data from the Financial Conduct Authority (FCA) showed that PI costs are already reasonably significant, especially for small firms so this increase will impact profitability.
The regulator found that financial advisers with revenue under £100,000 paid an average premium of £2,400, which represents around 4 per cent of their average revenue.
This compares to just over 1 per cent for the large firms with revenue of more than £10m.
Mr Parkin said: “While increased costs can be passed on to clients through higher fees, the emerging concern is that advisers may see policy excesses increase or DB transfer business limited or excluded altogether.
“Because firms buying PI insurance are insuring existing advice cases and not just new ones this could become an existential threat for some.”
“In fact, given how long it could take for claims to emerge it is likely that this legacy risk is the biggest one for insurers writing policies today.”
Even if firms stop recommending defined benefit transfers going forward they may still have trouble getting cover for the cases they advised in the past, he argued.
He said: “The natural redress for poor DB advice will likely involve buying an annuity to get the customer back to where they were before transfer. Given the size of DB transfers and where annuity rates are today just one or two uncovered claims could be disastrous for a small advice firm.
“These challenges underline why it is essential that advisers make sure their advice is water tight and that they can demonstrate that clients were not only made aware of, but fully understood, the consequences of transfer.”
According to Charles Chami, director of Glamis IFA, the rise in PI insurance premiums "is concerning for a couple of reasons, primarily because they indicate that insurers are seeing (or expecting) an increase in claims being made for poor advice".