Professional indemnity insurance (PII) is still one of the biggest thorns in advice firms’ sides.
While premiums have been increasing year after year, especially if companies are involved in the defined benefit (DB) pension transfer market, recent data by the Financial Conduct Authority (FCA) shows to what extent they are affecting advice businesses.
In its retail intermediary market update, the data for 2020 shows that smaller companies are the ones suffering the most.
Last year, PII premiums were 5% of regulated revenue for those businesses with up to £100,000 ($136,552, €115,901) in revenue. The average premium per firm was just under £3,000 with the average regulated revenue at approximately £58,500.
For advice companies with revenue between £101,000 and £500,000, premiums were 3.1% of their regulated revenue; with the average premium of £7,850 and average revenue of £251,000.
Whereas for bigger firms, those in the £501,000-£10m and over £10m revenue brackets, their PII premium was 3.2% and 1.4%, respectively.
Taking into consideration all regulated financial advisory firms, premiums on average were 2.4% of their revenue, showing that the smaller the firm, the higher the PII bill.
‘Prohibitive’ costs
Steven Cameron, pension director at Aegon, said: “PII costs have been an issue for some time with advisers regularly reporting that they have become prohibitive. Today’s data highlights that this is particularly the case for smaller advice firms.
“PII costs are now equivalent to 5% of revenue for the smallest businesses and 3.1% for those with revenues between £100,000 and £500,000 a year. Both of these figures are up on the same time last year, while they have remained steady for larger firms.
“This highlights just how important it is for continued focus on stamping out isolated bad practices which often lead to far wider hikes in PII. The FCA’s consultation on a new approach to decision making has the potential to speed up FCA interventions, avoiding the vast majority of highly professional firms suffering.
“Smarter use of data and market intelligence by the FCA will also help. In many instances this will be a far more direct solution than relying on the principles of a new consumer duty.
“Perhaps the best news in these figures is that the total number of advised clients grew last year to 3.54 million, up on 3.34 million in 2019. This is despite the fact that the pandemic made it difficult to meet, and advisers new business efforts had to be rethought.
“This is a great endorsement of both the industry and the value of financial advice which will have helped many navigate what turned out to be a very turbulent year.”
