The growing pains brought by hikes in professional indemnity (PI) insurance premiums earlier this year are still affecting the UK financial advice sector.
According to advisory business Beaufort Financial, the “fragmented and barely functioning” PI market is the biggest threat advisers face heading into 2020.
This is also because of the growing number of insurance firms stepping back from the PI market, the firm added.
Simon Goldthorpe, chairman of Beaufort Group, said: “The PI insurance market has seen a huge contraction in the number of insurers operating within it.
“As a result, we now have a situation where firms that are already insured are struggling to change insurer, and the best an adviser business can often do is hope that its existing insurer will renew.
“There are now so few insurers left, it may not even really be considered a market. Those that have remained can just cherry pick what business they want to do, and the industry is not far off the situation where there are no insurers left to cover IFAs at all.”
High risk, no reward?
PI insurance premiums rose sharply thanks to the increase in the UK Financial Ombudsman Service’s compensation limit to £350,000 ($457,120, €410,878) from £150,000 and also because of the surge in risk related to DB pension transfers.
This led to many insurance firms, such as Liberty Special Markets, to stop providing cover to businesses performing such transfers.
But PI-related issues can be traced back to the British Steel Pension Scheme scandal.
The Financial Conduct Authority said earlier this year that, in worst-case scenarios, premiums could go up by 200% to 500%.
But the regulator’s director of life insurance and financial advice supervision, Debbie Gupta, said at a recent conference attended by International Adviser, that firms which do not have PI cover should not be advising on DB transfers at all.
Demands not being met
Goldthorpe added that many insurance firms have added clauses related to DB transfers.
“A lot of insurers now have terms and conditions that say: ‘We’re not covering DB transfers. We’ll provide a regulatory minimum to insure, but we’ll add restrictions’.
“Once you’ve got restrictions, the risk is that the cover that you need is potentially missing, when you need it the most.
“Five years ago, a typical excess would have been £2,500-£5,000 per case. Now, £25,000 excesses are not uncommon.
“We saw a case last year that was £50,000. If you’re paying the first £50,000 of every claim, that’s not really insurance.
“This is a huge threat to IFAs, and in most cases it has occurred through no fault of their own. It needs addressing urgently as the market we have now is very inefficient.”
He added: “IFA firms used to be able to insure themselves for around 1-1.5% of their turnover. But now, that figure looks more like 2.5-3%. This could happen to good quality firms that have a fairly low risk profile.
“Where that leaves the rest of them is either facing higher premiums or having policies with so many restrictions that they are basically self-insured.”