The PII market has been suffering in recent years due to the ongoing hardening of PII in all sectors but particularly for advisers.
This has been exacerbated by concerns over the defined benefit transfer market which has resulted in many insurers turning their backs on advisers and pulling out of the market altogether, leaving advisers only a handful of insurers to choose from.
But the ongoing coronavirus crisis could heighten these underlying factors, according to Keith Richards, chief executive of the Personal Finance Society, which could lead to issues for advisers down the line.
Mr Richards said: “The market turbulence around coronavirus could make these underlying factors more acute, resulting in an impact for advisers at renewal as insurers themselves struggle to cope or the capital available to PI insurers as investors could see them seek to de-risk.”
But he added the true impact of the current economic crisis was hard to predict but could cause the PI market to shrink further, making it even more difficult for advisers to get cover.
Mr Richards said: “It is possible that the market turbulence surrounding coronavirus could shrink the PI market, but it is impossible at this stage to say whether this will happen, but the impact would be significant.
“However, even before the emergence of the threat of the coronavirus, we were seeing very serious challenges for advisers seeking PI insurance. What is needed is a radical reform of the compensation system for the UK.”
Robert Morris, partner at law firm RPC, warned if this were to happen or if the Financial Conduct Authority were to restrict the exclusions that PI policies contain, insurers would have no choice but to either push up premiums even more than they have done in the last year or stop providing PI to advisers altogether.
Most PI insurers carry policy exclusions for fund insolvency, defined benefit pension transfers and unregulated collective investment schemes (Ucis).
The FCA has recently hinted it may look into PI insurance for advisers with a view to possibly removing exclusions from policies.
But Mr Morris said doing this could force advice firms out of business.
He said: “If the FCA were to restrict the exclusions that PI policies contain, insurers will be forced either to increase premiums even more than has occurred in the last year or so (following the increase in the Fos award limit) or cease writing PI insurance for FCA regulated firms altogether, thus reducing yet further the number of insurers operating in this market.
“The consequences of this is likely to include more advisory firms being forced out of business and more claims falling on to the FSCS. Neither of which, ultimately, will benefit consumers.”
The coronavirus crisis could also force PI insurers to make changes to their exclusions.
According to the PFS, some insurers are making significant increases in excesses and even excluding retroactive cover for past DB transfer cases.
But Mr Morris said moves like these are essential so the PI market can continue to operate and provide cover to advisers.
Mr Morris said: “The provision of professional indemnity insurance is a business and one which insurers will only participate in if they have reasonable prospects of making a profit.
“Underwriting profit can only be made if, over any given year, the overall level of claims paid are less than the overall level of premiums charged.”
However, this comes at a cost as due to the current situation many advisers may struggle to renew their PI over the coming months.
Therefore the PFS has urged the Treasury and FCA to permit a four-month grace period for advisers whose PI insurance is due for renewal during the coronavirus lockdown.
The body said this was important at a time when demand for adviser’s help " has never been greater, yet pressure on their own resources are stretched".
amy.austin@ft.com
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