Underwriting appetite dwindles in the wake of pension mis-selling claims and an increase in the award limit of the Financial Ombudsmen Service
London Insurance Market Exchange (Lime UK) is the latest carrier to pull back from the professional indemnity market for independent financial advisers (IFAs). As reported in Insurance Times on 14 November, the insurer – an appointed representative of the Underwriting Exchange – is no longer renewing policies in 2019, citing a “particularly tough” market.
In July, Liberty Specialty Markets pulled out of pensions PI insurance, further compounding the issue. The move came as the FCA announced it was taking further action over defined benefit pension transfers, due to firms giving an “unacceptable standard” of advice.
In April, the FCA increased compensation limits in cases referred to the Financial Ombudsman Service from £150,000 to £350,000. The regulator estimated the price of PI insurance for defined benefit pension transfer specialists could increase to an upper limit of 140%, arguing that “the number of remaining firms would be sufficient to ensure competitive outcomes of consumers”.
But the Personal Finance Society (PFS) warned the FCA and the Treasury that the changes were resulting in premium hikes for its members of up to 500%. PFS chief executive Keith Richards said the body would continue to “highlight the growing risk exposure of small firms resulting from high PI insurance excesses and exclusions as well as the immediate impact on the cost of insurance.”
“Certain professional sectors have been hit harder than others,” said Pete Willcocks, founder and managing director of broker Larsen Howie.
Willcocks said: “We don’t cover IFAs and certainly for the last four to five years no insurer really wants to touch those. Anything IFA is viewed with caution by insurers. They’re very risk averse to them.”
With such a significant reduction in capacity and skyrocketing prices, brokers are struggling to place the business.
Richard Webb, director of Manchester Underwriting Management, added: “IFAs are a massive challenge [for brokers], due to the potential for retrospective claims and issues surrounding the mis-selling of drawdown pensions. One broker I know has a client that is now facing a six-figure premium, whereas previously they were paying a five-figure premium – it’s a huge jump.”
Pension transfer volumes down
Pension transfers across the market dropped over 20% in Q4 2018, from £8bn to £6.3bn. In total, £92bn has been transferred since the pension freedoms launched in April 2015.
According to Tom Selby, senior analyst at AJ Bell, most activity is likely to be savers transferring defined benefit schemes in favour of the flexibility of defined contribution.
“A number of factors are contributing to the recent slowdown,” he said. “The FCA’s increased focus on the market has undoubtedly had an impact, forcing a number of advisers to exit. Rising insurance costs for advisers is also affecting supply, with a knock-on impact on the volume of transfers taking place.”
Selby said it would not be a surprise to see the volume of defined benefit transfers halved for the year to end of September 2019, when the data becomes available.
He added: “While I am sympathetic to the FCA’s concerns, I don’t agree with their default position that pension savers shouldn’t transfer from a defined benefit into a personal pension.”
Lloyd’s performance review drives PI insurer exits
While IFAs are currently one of the most distressed sectors, other high-profile exits from the professional indemnity (PI) sector over the past 12-24 months have diminished capacity for solicitors PI and design and construction firms.
Lloyd’s performance management director Jon Hancock’s clampdown on the least profitable business in the market targeted PI insurance as one of the worst performing classes. The non-US PI market lost $435m (about £347m) over five years, according to Miller Insurance.
As a result of the Decile 10 review, Aspen, Beazley, Brit, Barbican, Channel Syndicate, Hamilton, Hiscox, Libra Managers, MS Amlin and Pioneer, among others, pulled out of the class, resulting in a significant contraction in the number of markets offering the cover.
“The general consensus is that it’s going to continue and probably get worse because as this year has progressed each month PI insurance pricing has hardened and capacity has shrunk,” said Webb. “One of my colleagues made the comment earlier that it’s been a bit of a quiet week because there hasn’t been somebody pull out.”
The departures have left some managing general agents (MGAs) struggling to quote in 2019 as they have lost so many backers, including Aon’s solicitors’ PI MGA Maven, which exited the market suddenly in August.
“A number of insurers are withdrawing from the solicitors PI market, including Maven Underwriters,” said Aon. “Some Lloyd’s capacity providers who have previously supported the Maven MGA have withdrawn their capacity as part of the Lloyd’s profitability review.
“Aon has negotiated with alternative insurers and partner brokers who specialise in PI for solicitors to ensure that all existing Aon/Maven clients with cover lapsing on 30th September 2019 are offered a renewal strategy that will deliver the very best terms available in the market.”
Solicitors seek extensions after tough renewals
Solicitors who are unable to secure PI insurance cover are being urged by The Law Society to extend their policies for 90 days.
While the common renewal date of 1 October was scrapped, up to 70% of solicitors PI is renewed on this date. This year’s renewal was the most difficult since the abolition of the Assigned Risk Pool in 2013, according to Brian Boehmer, a partner at Lockton specialising in PI insurance.
Writing for legal news website Legal Futures, he bsaid that more practices than ever are falling into the extended 90-day indemnity period as they struggle to secure cover.
“An analysis of the new business enquiries seen since 1 October indicates a plethora of reasons for this, including insurer exits and a change in risk appetite from participating insurers, but also, worryingly, that many practices are simply leaving their insurance to the last minute,” he said.
In an advisory update, The Law Society notes that firms that reach the end of their extended indemnity period without securing solicitors PI insurance will have to close. Larsen Howie managing director Pete Willcocks said some firms had already been forced to close their doors.
“I have heard that some solicitors can’t even get cover and of one company that has had to go into liquidation,” he said.
Another complication is likely to arise when the Solicitors Indemnity Fund (SIF) closes in 2020, which may mean firms have to buy additional run-off protection. Current requirements are for law firms to take out a minimum of six years run-off cover when they close, with the SIF stepping in to cover claims that may arise after that period.
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