With a shrinking number of willing insurers, financial advisers face fresh challenges securing their professional indemnity insurance (PII). As if squeezed market capacity doesn’t complicate life enough, regulatory changes have thrown an extra couple of sticks of dynamite into the mix.
From the start of Pension Freedoms, we knew that advisers who gave Defined Benefits Transfer advice would present a higher risk, simply due to the sums involved. In 2017, the risks around DB became public knowledge as the British Steel Pension Scheme hit the headlines.
In 2019, DB transfers are top of mind once again, due to the FCAs decision to increase FOS awards from up to £150,000 to a maximum of £350,000, for advice given after 1st April 2019.
Insurers remain extremely cautious about providing terms for firms involved in significant volumes of transfers, from 2015 onwards.
What can financial advisers do?
The FCA have been consistent in their message that a transfer should be for the minority. They have stated many times that a fixed - often inflation linked - income for life should not be given up lightly.
Be prepared to explain your numbers, with particular regard to the amount of enquiries against the number transferred, and the reasons why a transfer was deemed suitable. Look carefully at capacity for loss and other sources of income. Keep all the records you can.
Be prepared to put more time and effort into your submission to the insurance markets, who are more stringent about PII clients than at any time in living memory.
Didn’t give DB advice? PII market capacity squeeze still affects you
In spring 2018, Lloyd’s of London announced a combined loss of US$2.1bn for the 2017 underwriting year, followed by another US$1bn loss for 2018. This immediately triggered a review, putting both poor performing syndicates and lines of business under the microscope.
PII was singled out as the second worst performing class (US property was the worst). The Syndicate Management provided business plans setting out how matters would be rectified. In cases where compelling solutions weren’t forthcoming, many syndicates opted for the tactical withdrawal, walking away from the PII markets entirely.
Other syndicates had their underwriting capacity reduced, so even though they are still keen to support the category, they are unable to accept the same volumes of PII clients as before.
For those firms which do not - or have chosen not to - undertake DB transfer work, the picture is better but the shortage of capacity may still lead to mean rises in premium.
Start early and get competitive
In 2019, for professional indemnity insurance, it is a seller’s market – where you can find someone willing to sell, that is.
For every financial adviser renewing this year, we recommend starting the process early. Be sure to provide suitable detail, because there is an element of ‘competition for places.’
In insurance terms, we call this a hardening market – and in a hardening market both experience and relationships come to the fore.
As we have previously maintained, the profession has generally been pretty good at delivering positive outcomes for their clients. There’s no doubt that it is getting harder for financial adviser to secure competitive terms, but with time and a little extra effort, it’s still possible.
A note from the author
This editorial was written upon request for a provider’s newsletter, so please remember that it provides a broad overview only of the current market.
As outlined above the PII market for Financial Advisers in the UK has not been the calmest in recent years and most firms have noticed a considerable hardening of the market. This means that many Financial Advisers have been facing increased premiums, excesses and exclusions which have had a negative impact on the way their firm operates. It is at this time that having a good relationship with a specialist broker becomes fruitful.
At Howden, we continue to work with insurers for full support of our clients. We are well positioned to secure the best deals available with detailed claims statistics spanning over the past twenty years, and a strong team of experienced industry specialists.
Please feel free to pick up the phone or visit the Financial Advisors page of our website for further information on our insurance offerings.