Brokers explain PI premium hike

Brian Boehmer, partner at Lockton UK’s global professional and financial risks arm, blamed the sheer number of claims made against advisers in recent years for the cost increase, and said while premiums will unlikely return to former levels they will soon "level out".

Mr Boehmer dismissed the commonly held belief that the increase in compensation limits that happened earlier this year was behind the change to PI cost and said market trends would have always led to this outcome.

In April the Financial Conduct Authority increased the ombudsman's award limit from £150,000 to £350,000, accompanied by a forecast from the PI market that the rise could push up premiums by 500 per cent in a "worst-case" scenario. 

Since then some advisers have seen their PI premiums increase exponentially, with the Personal Finance Society last week confirming one adviser had reported the cost of his insurance had risen from £6,700 to £27,000. 

I think advisers should budget for premiums to be around this level for a little while yet...Brian Boehmer

But Mr Boehmer said whilst the Fos increase "focused the minds" of underwriters, it was not behind the premium increases and drop in the number of insurers willing to write the class. 

He said: "The increases in premiums being put forward is largely down to the claims activity that these insurers are seeing.

"You’re adding to some difficulties in the insurance market...and there’s a restriction in insurer’s appetite with an increase of rates even for practices with no claims activity." 

In its annual review published last month the financial ombudsman reported it had received 1,915 new complaints about advisers in the 2018/19 financial year, jumping 14 per cent on the 1,678 received in 2017/18.

In a performance management review last year Lloyd's of London ranked non-US professional indemnity insurance as the second worst performing class in 2018. 

Mr Boehmer said: "Advisers should budget for premiums to be around this level for a little while yet. But there needs to be a period of benign claims activity before rates will reduce, and at the moment we’re just seeing more and more claims."

Julian Brincat, director of IFA at broker Protean Risk, disagreed somewhat.

He said he had seen a "noticeable shortage" of insurers participating in the IFA PI market but he does not believe current claims activity was directly correlated to the increased rates and excesses that many firms are now facing. 

He said: "One of the difficulties that underwriters are facing is how to assess the exposure that IFAs have as changing regulation and Fos decisions have the potential to create large systemic losses in the market.

"Underwriters therefore have to assess on a worst case scenario basis, especially if they intend on being able to continue underwriting IFAs should claims activity increase in a policy year.

"The sizes of the individual [pension] transfers, together with the increased Fos award limit has created a significantly increased exposure for underwriters especially when looking at a book of business so this has had to be reflected in the pricing."

Minesh Patel, chartered financial planner at EA Financial Solutions, thought the "toughening" of PI conditions had been caused by an accumulation of different events, including rising claims and a desire by the FCA to clean up the defined benefit market.

He said: "There certainly has been a rising tide of claims against advisers, especially in areas such as self-invested personal pensions and pensions switching.  

"Whilst the whole area has had a lot of claims over the past few years, I do think the Fos limit increase was rationale for insurers to toughen up their PI criteria. 

"Clearly in the defined benefit transfers area the last thing the FCA and PI insurers would welcome is small firms going into the market big time and not having the reserves to meet claims if and when they arise."

He added: "We are going through a period of real transition in the industry and it will take some time to level out."

According to Mr Boehmer, to navigate the hardening PI market advisers must now prepare early for policy renewals and be willing to offer more detailed information about their practice.

He said: "To get the best outcome, advisers need to give more information about their practice. If they don’t, then the easiest thing for an underwriter to do is say ‘no’."

Mr Boehmer said a "comprehensive" presentation should be presented to insurers from the outset, with a fully completed proposal form and additional information to support applications.

Mr Boehmer said: "Previously I think IFAs could get away with providing a fairly short declaration of information...but I think you’ve now got to put a bit of effort into the presentations and there is much more onus on the IFA."

He added: "Everyone is vying for a limited number of underwriters’ time, and the last thing an underwriter wants to do is be drip-fed information.

"It’s important that the practices put forward a succinct presentation about their practice, how they go about their practice at the outset and not just drip feed information to a particular insurer, because there are a limited number of insurers willing to write this class of business."

rachel.addison@ft.com

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