Your IndustryJun 7 2018

Advisers fork out £17,540 for PI insurance a year

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Advisers fork out £17,540 for PI insurance a year

Financial advisers paid more than £300m in professional indemnity insurance premiums in 2017, according to data from the Financial Conduct Authority.

On average, across all financial advice firms, professional indemnity insurance (PI) premiums were £17,540 - or 1.9 per cent of their revenue - but this masked the wide difference between the amounts paid by smaller firms and bigger ones.

The FCA found that when looking at average premiums paid as a proportion of regulated revenue, small firms generally paid a greater percentage than larger firms.

For example, financial advisers with revenue of less than £100,000 paid an average premium of £2,400 which represented around 4 per cent of their average revenue.

This compared to just over 1 per cent of revenue - more than £882,000 in cash terms - for the large firms with revenue of more than £10m.

In cash terms and as a proportion of their revenue, mortgage brokers paid smaller premiums than financial advisers, with the average across all firms being only £8,784 - or 1 per cent of revenue.

Mortgage brokers also faced the same disparity between smaller and larger firms - though to a lesser extent.

Those with revenue under £100,000 paid an average premium of £872 which represented 2.2 per cent of their average revenue.

This compared to just 0.8 per cent of revenue - more than £346,000 in cash terms - for the large firms with revenue of more than £10m.

Insurance intermediaries faced the largest average premiums in cash terms - more than £50,000 - but these were only 1.5 per cent of revenue.

The FCA requires firms to hold PI insurance cover to make sure they have the means to pay negligence and other claims and to help prevent insolvencies leading to excessive claims on the Financial Services Compensation Scheme (FSCS).

The regulator has proposed a number of changes to the PI market as part of its plans to reform the FSCS, which include plans to force insurers to cover some of the cost of compensation by allowing the body to claim against a defaulted firm's insurance.

But this has prompted concerns insurers will simply leave the market and there have been instances of insurers hiking premiums because of concerns about defined benefit pension transfers.

Matthew Walne, managing director of Santorini Financial Planning, said: "I am paying about 2.5 per cent of turnover. I guess the way most people would like to see it being reformed is like car insurance where you get a no claims discount.

"If you are a high-risk firm with a lot of complaints you should be paying more than a firm which does boring vanilla stuff.

"I know there are some firms which are struggling. My premiums have gone up but not massively, I have to say."

damian.fantato@ft.com