Professional Indemnity insurance for financial advice: is the market broken?
In yesterday's New Model Adviser, Mark Neale has urged advisers to put pressure on professional indemnity insurers to fix a market he has described as a 'broken reed'.
I am no insurer and I do not profess to understand underwriting. I would, however, make the following observations.
PI insurers will only presumably provide cover for financial advisers if they see the book of business as profitable over a period of time. The difficulty we have is that over the last five years or so, most insurers I have spoken with have said that writing financial adviser business has not been profitable. This is reflected by a recent trend in increased rates for professional firms and more limited cover being available. If it wasn't for these factors, the financial adviser insurance market would be smaller than it is now (and by market logic, more expensive).
If I look at the main insurers who provide this type of cover, then the market has changed significantly over the last five years, with many established players having withdrawn from this market. The insurance brokers I speak to face a constant battle to find new markets and convince those remaining players to stay in the market.
Insurers have raised with me several issues which put them off writing financial adviser business, although it is difficult to generalise. Some are frustrated by FOS' inconsistency and the fact that FOS want to determine high value complaints over £150,000, applying a "fair and reasonable" analysis to what becomes a large exposure. Others are worried by the trend in complaint splitting by FOS, where FOS write to the firm and say that they are minded to split the complaint into multiple complaints, thereby attracting multiple limits and again leading to large exposure for insurers. Whether FOS consider these steps within their power or not is to some extent academic – it has an impact on the insurance market.
Then there is the FCA. Insurers perceive that the FCA's general approach can drive up costs and exposure beyond what they need to be. Take, for example, the FCA's recent general encouragement for EEA investors to make sure they complain before they are time barred from doing so. Insurers have said that the FCA's use of s166 and past business reviews sometimes feel like the FCA are using a sledgehammer to crack a nut.
In other words, when there is an issue for the financial adviser market it tends to be a very expensive one for insurers.
The reality is that I suspect firms have very little power to put pressure on the professional indemnity market. We have been reaching out for a while to convey this message to the regulator and to FOS. In fact, if firms or the regulator put more pressure on professional indemnity markets then the market will shrink even further, exacerbating the very issue Neale is concerned about. If the FSCS wish to avoid the cost of failure falling on the industry (and we agree this is an outcome that should be avoided) then the solution has to be broader than asking professional indemnity insurers to burden more exposure.
On a more positive note, the FCA has recently indicated a willingness to meet with some professional indemnity insurers to hear their concerns. This is a welcome development and one that is in our court to take forward. We suspect it will be a worthwhile discussion, whatever the outcomes. Whether we can make progress and address the issue Neale identifies, we will have to wait and see. The one thing I am confident about is that a solution focussed solely on PI insurers taking on extra exposure will cause more problems for firms and therefore the wider industry.