Gaining access to affordable professional indemnity (PI) insurance market has been a real challenge for many financial advice firms over the last few years, but studies show the problem may be bigger than you think.
The Personal Investment Management & Financial Advice Association (Pimfa) surveyed 84 business owners and chief executives of member firms and found only 17% have confidence in their ability to secure affordable PI cover in the future.
The survey also revealed that over half (56%) of its members reported their PI insurance contained significant restrictions, including on historic advice related to defined benefit (DB) pension transfers, leaving firms without cover for advice given before the insurance policy began.
Over a quarter (26%) of companies reported PI insurance premiums had increased by more than 100% in the last five years.
Big regulatory bills
Additionally, some firms reported that they have not been able to secure cover because their premiums had increased so dramatically, forcing them to keep higher capital reserves and potentially threatening to drive them out of business in breach of the Financial Conduct Authority’s (FCA) own remit to maintain competitive markets and best outcomes for consumers.
Some Pimfa members said they felt they were being penalised twice, with both ever rising Financial Services Compensation Scheme (FSCS) levy payments allied to PI premiums, which were in a few cases as much as 600% of their FSCS levy bill.
Of those that responded to the Pimfa survey, 45% reported increases in their FSCS levy bill of more than 100% in the last five years.
More than eight in 10 (82%) said that FSCS costs now accounted for at least 20% of their outgoings, excluding payroll and accommodation costs.
Existential threat
Tim Fassam, director of government relations and policy at Pimfa, said: “Pimfa believes that the inability of advice firms to afford and, therefore secure comprehensive professional indemnity insurance represents a genuine existential threat to the industry.
“Advisers are increasingly concerned about their ability to gain comprehensive cover, which not only harms their ability to operate in future, but also represents a barrier to new entrants into the market.
“We are particularly concerned about the absence of comprehensive cover for advisers. This only feeds into concerns we have about businesses failing as a result of claims, and falling onto the FSCS as a result.
“Whilst we understand that the provision of PI insurance is a commercial decision, it is also clear that the increase in premiums over the preceding five years has ultimately been driven by the unintended consequences of policy decisions and concerns about supervision.
“Government, regulators and industry must work together to ensure that, policy is designed in a way that is predictable and allows a healthy and diverse market to thrive. If these aims were to be achieve it should follow that PI insurance premiums fall to more manageable levels.”
