Premiums soar for independent financial advisors’ PI as insurers dwindle

Looking back over the years, there have been progressively fewer insurers providing professional indemnity (PI) cover for independent financial advisors (IFAs).

Ongoing regulatory changes in the defined benefit (DB) pension transfer market has led to many insurers exiting the IFA PI market altogether. Currently there are around 5,000 directly authorised financial advice firms but only seven insurers – so the demand is intense.

Where there are less insurers, insurance premiums generally rise, Tim Little, underwriting director in financial lines at MGA Inperio told Insurance Times.

Some firms are facing a substantial increase with premiums being hiked from £10k a year to £50k.

“The insurers that remain in the market are becoming increasingly protective of their portfolios and exiting any risks that do not fit their new criteria,” he said.

In light of this, Inperio recently signed a multi-year deal with specialist underwriter Accredited Insurance (Europe) Limited (AIEL), which offers capacity to IFAs.

After the 2008 financial crisis, a lot of insurers exited the market as there was a huge systemic loss issue following the collapse of large funds – as well as a loss to many advisors.

Now, with the significantly hardened market being further exacerbated by the UK potentially heading for another recession post-pandemic, Insurance Times takes a closer look at the IFA PI market, what brokers can do and whether there is a solution to save this essential service.

It follows the FCA targeting 1,853 advice firms that hold DB permissions in its latest survey, regarding transfers made between April and September 2020.

No easy solution

The pandemic has put further strain on IFAs to get PI cover due to the increased demand for financial advice – something that Keith Richards, chief executive of the CII’s Personal Finance Society, alluded to in May after requesting that IFAs have a four month waiver on renewing their PI insurance during the pandemic, and for HM Treasury to become a reinsurer of last resort.

But these problems, which draw parallels with issues in the construction PI sector, have “no easy solution”, Little continued - particularly as PI as a class is seeing premium increases and capacity constraints.

“Until those issues are solved for insurers, they will continue to have this constraint for capacity in the market,” he added.

Nikhil Rathi, the FCA’s chief executive, recently told MPs it could take two to three years to abate the industry levy and solve the PI market dilemma, after he admitted it was not functioning well for IFAs.

Regulated by the FCA, IFAs have been scrutinised on DB transfers, with pressure put on advisors to give up their permissions if the regulator believes firms are not equipped to continue giving advice.

The FCA’s measures aim to reduce risk for insurers - and subsequently premiums - if unsuitable advice is culled. It believes this intervention maintains consumer access in a competitive market for pension transfer advice in the long-term.

Little added: “Insurers in some cases are given very little choice to either exclude the cover or not renew the risk. If it happens that the cover remains the same, chances are there will be a fairly high substantial premium increase.”

Cannot unilaterally change

Meanwhile, the Financial Services Compensation Scheme (FSCS) imposed a supplementary levy of £50m on IFAs in January following a surge in pension claims.

This is because claims under IFA PI policies are protected by the FSCS at 100%. Therefore, any compensation incurred because of the PI insurer defaulting would be met under the general insurance provision funding class.

Caroline Rainbird, FSCS’s chief executive, said: “The overall levy increase is due, in part, to an ever-growing number of claims against self-invested personal pension (SIPP) operators, which continues the rising trend of pensions-related claims.”

She cited a year-on-year increase in the number of SIPP claims that it has paid out – from just over 4,750 in 2017/18 to more than 7,300 in 2019/20. But the total amount of compensation stands at over £455m.

Rainbird admitted that without levy payers’ funding and support, the FSCS could not “do the crucial work” it needs to, as the insurance industry is one of its key stakeholders.

Although she is aware of rising compensation costs, increasing levies and the impact on levy payers, she continued: “The regulators set out the scope and structure of our funding arrangements in consultation with the industry, so we can’t unilaterally change anything.”

But some firms are seeing premium increases of over 100%. In October, for example, an advisor based in Greater Manchester was hit with an 174% increase to its FSCS levy, according to the FT Advisor.

For Ravi Takhar, chief executive of Bexhill Insurance, the worst-case scenario is that long-serving IFAs will not survive.

“It just doesn’t seem fair,” he said and, like Little, warned that surviving firms would need to raise customer fees.

“There’s a contraction with those providing that service, which means the same service costs more,” Takhar added.

Lack of capital adequacy

Little said if an insurer applies an exclusion for historical advice, it becomes a liability, therefore a couple of claims could wipe out a finance firm and, in turn, impact the FSCS.

This is because the average transfer value for a UK firm is around £350,000, but most firms do not have the capital adequacy to cover more than one claim.

Little stressed that most IFAs are “very diligent”. If an insurer gives the IFA firm the option to remove cover for DB transfer liability and IFAs give up their permission to give advice, they are effectively transferring liability claims relating to historical advice onto their own balance sheet.

Little recommended that the FCA works more closely with insurers to fully understand these concerns.

‘Broking like they have never broked before’

Little continued: “Brokers are broking risks like they have never broked before. Insurers could potentially do more, but ultimately insurers are answerable to their shareholders and boards. If insurers cannot present a strong case to write a class of insurance, there’s no rational reason why they would.”

He suggested that more insurers need to enter the IFA PI market.

“This class can be underwritten properly; it just takes more diligence than that which insurers have previously given the class. You can’t fast track this type of risk – and underwriting by exclusion is not the answer.”

As insurers are commercial privately held entities that need to make a profit, the regulator forcing them to provide cover for an unprofitable line is inevitably going to push more to exit, leaving customers exposed.

“This is not going to benefit anyone. If that happens, where does the government go with covering those liabilities? They will have to create a state insurance pool, which is potentially very costly,” Little added.

He argued that the government should allow insurers to determine how they insure IFAs and advise on the risks.