The financial press has been full of tales of woe for financial advisers: increasing Financial Conduct Authority fees, increasing Financial Services Compensation Scheme levies, reducing income and ‘massively’ increased professional indemnity insurance costs.
As insurance brokers we speak to financial advisory businesses multiple times a day and try to assist in helping them navigate through these difficult times. We are not always able to help but, putting this aside, some of the stories do appear rather sensationalist.
As a result, I would like to provide some commentary on the PI insurance market to distinguish the facts from the fiction. I will also shed some light on what you can do to help your next insurance application.
- There has been a lot of concern about rising PI insurance costs
- There is lack of supply in the insurance market
- Advisers can take steps to make their application easier
Any company that has had a recent renewal will know that premiums have increased; in fact they have done so consistently for two years, but a look at the table (compiled from the FCA’s own figures) will put the premium rates (being premium as a percentage of turnover) into context.
|Turnover of IFA||Total premium||Average premium||Average revenue||PI premium as a % of revenue|
Up to £100K
|More than £10m||£32.2m||£1m||£75.9m||1.4%|
These are the figures to the end of 2019 and there has continued to be premium price pressure through 2020 to date. Now, there is evidence that premium rises are slowing.
Of course, showing average figures does hide some of the variations. For example, a company that has undertaken a significant number of defined benefit pension transfers will likely pay a very different premium to one that principally advises on investment and protection policies.
Similarly, a company that has had a number of claims in the past compared with one that is claim-free will also pay a higher premium.
So what is driving these premiums?
- Lack of insurance capacity: with only five or six insurance markets and a general lack of interest in new business from these carriers, the ability to source competitive alternative quotes is extremely limited;
- Insurers’ concerns over the now maximum Financial Ombudsman Service award of £355,000 for complaints referred to Fos on or after April 1 2020 for acts or omissions by companies on or after April 1 2019. Complaints about acts or omissions by companies before April 1 2019 and which are referred to FOS after that date will remain at the maximum £160,000;
- The FCA’s continuing investigation of the companies that gave DB transfer advice; and
- Concerns over the state of the UK economy both from a Covid-19 recessionary basis and from the uncertainty surrounding our exit from the EU.
Like any marketplace, price is a consequence of supply and demand. The supply side has been constrained since the Lloyd’s of London review of May 2018, following a significant underwriting loss in the 2017 year of account.
The Lloyd’s franchise board acted to look at poorly performing syndicates and more scrutiny was placed on poorly performing lines of business – non US PI being one of those lines of business being identified.
This meant a number of syndicates came under scrutiny – some had to represent their business plans and for some this meant they had their capacity reduced, some pulled out of the class and indeed some ceased underwriting.
This had an effect on a number of classes of business and PI insurance in particular.
With increasing premiums came a further squeeze on capacity, as the insurers’ capacity is used at a faster rate, meaning they are unable to insure as many risks.
The shrinking of capacity and pressure on premium pricing is referred to as a hard market and typically we get to a stage where the premium pricing attracts new entrants to the market in order to take advantage of this opportunity.
This usually creates competition and then we start to see premiums fall again, leading to what is known as a soft market.