“While PI insurance plays an important role as a ‘first line of defence’ for consumer claims, it has limitations as a compensation mechanism. PI insurance is designed to protect licensees against business risk, and not to provide compensation directly to investors and consumers. ”
— “Professional indemnity insurance review completed”, MEDIA RELEASE (17-286MR)
Explore the evolving Professional Indemnity Insurance (PII) market for advisers and Licensees
Most Australian Financial Services Licensees are all too well aware that, in recent years, the Professional Indemnity Insurance (PII) market has hardened and been defined by increased premiums, more stringent underwriting criteria, and a reduction in the capacity offered by insurers. These conditions may have largely been in response to global insurance market trends including a heightened appreciation of risk, particularly in the financial services sector. Additionally, it’s been anything but stable; the market has seen fluctuations with insurers entering and exiting, impacting the availability and pricing of policies.
While new entrants sometimes bring competitive terms, the exit of established insurers also leads to the reduction in market capacity and fewer options for Licensees. To be fair, regulatory changes and increased compliance demands have also significantly influenced the PII market and increased the need for AFSL compliance services. In the wake of the Hayne Royal Commission, ASIC increased its scrutiny of advisers and licensees, leading insurers to adopt more cautious approaches including requests for more detailed information and stronger assurances regarding compliance and risk management practices. The PII market was also significantly impacted by the claims experience within the financial services sector, including high-profile cases of professional misconduct and financial advice failures. These incidents prompted insurers to reassess their risk exposure and adjust their pricing models, generally leading to higher premiums and more selective underwriting.
The complex interplay of regulatory, economic, and market-specific factors had an effect, but it’s not all bad news.
In this article, we delve into the current landscape of the Professional Indemnity Insurance (PII) market to provide good news and practical tips for Licensees looking to apply for, or renew, PII cover. To provide expert insights, Greg Hansen, Head of Professional Risks at Austbrokers Countrywide, opens up about the ongoing trends and challenges in the PII sector.
Market Changes in Professional Indemnity
How has the PII market for AFSL Holders evolved in the past 12 months?
The good news is that, after a prolonged period of difficult conditions, the PII market has shown improvement recently, especially for AFSL Holders. New insurers, including Lloyds of London, have entered the market, showing interest in covering financial planning risks and exerting downward pressure on pricing. This competition has resulted in more favourable pricing for advisers and licensees, marking a significant change from the previously tough market conditions.
Impact of APL Size on Pricing
How does the breadth of the Licensee’s APL affect PI insurance costs?
The size and complexity of a Licensee’s Approved Product List (“APL”) remain critical factors for PI insurers. They assess the range of alternatives and specific products listed on the APL, including mortgage funds, hybrid securities, unlisted securities targeted at sophisticated investors, hedge funds, and direct shares. It wouldn’t surprise anyone to hear that the Insurers will consider the adequacy, breadth and depth of the APL, but they don’t limit their consideration to the number of products on the APL. They’re very interested in the composition and structure of the Approved Product List, as well as the Licensee’s research and review methodology.
Having an expansive APL isn’t a problem if the APL is properly managed and monitored; in fact, a small and badly-managed APL may be far more problematic than a larger, properly-constructed and well-managed one. They’ll also closely scrutinise advice processes and be particularly interested how Licensees manage products in which they may have a financial or other interest. As a general rule, simplifying your APL may be an effective strategy for reducing your premium, but it needs to be balanced with the need for comprehensive coverage that aligns with the PI insurer’s policies.
I want to reiterate the need for Licensees to focus on the governance aspects of APL management and ensure that their Approved Product List is, and remains, current, adequate and appropriate for their business and the needs of their clients. This should be a “top of mind” consideration for Licensees because many policies often include the following conditions
- We only cover you for advice in relation to products which are on your APL;
- We will also cover you for advice in relation to switching from a non approved to an approved product; and
- In addition to above, we also cover you advising a client to continue to hold an investment which is not on the APL on the basis its in the clients best interests to do so.
TIP: Aim to develop a clearly presented, and well-structured, APL that’s regularly reviewed by a competent Investment Committee (or equivalent).
Rewards for Strong Compliance Records
Are licensees benefiting from maintaining robust compliance records?
Yes, insurers highly value strong compliance records. They favour licensees with efficient compliance management systems that facilitate data oversight and error reduction but they’re particularly interested in regtech that evidences and supports effective oversight. In addition, regular independent compliance reviews are also seen positively, with insurers often requesting these reports during PI insurance renewals. This emphasis on regulatory support for financial firms is increasingly critical in the current market.
I appreciate that Licensees may have the capacity to do their own assessment, but insurers like the idea that an external party comes in and reviews and/or audits compliance policies and procedures and they this often has a material impact on pricing.
TIP: Adopt a compliance management system that will help you manage your governance and compliance framework.
Primary Concerns of Insurers
What are the main concerns for insurers in the current market?
Insurers are currently wary of substantial risk insurance claims, particularly those involving significant sums, such as the recent $2 million income protection claim. Fraud by Authorised Representatives remains a major concern due to the high value of claims in this area; I’ve seen several claims in excess of $10m.
The number, size and frequency of these claims has a huge impact on PI Insurer’s risk appetite and the conditions under which they’ll offer cover. In my view, Licensees can mitigate this apprehension by demonstrating that they have an effective monitoring and supervision regime in place (ideally with external validation) and a mature risk-management framework. In fact, we generally encourage applicants to elaborate on any specific measures they’ve taken to monitor and mitigate conduct and fraud risk, because it can only help them secure better cover.
TIP: Review your supervision framework or, better yet, engage a third-party to do so.
Affordability of PII for Small Licensees
Is affordable PII accessible for smaller licensees?
Affordable PII remains within reach for small licensees. Over the past five years, there has been a notable trend of businesses moving away from large AFSL Holders and obtaining their own licenses.
Operating costs for an AFSL have decreased, and the minimum PI insurance premiums have halved from $20,000 to $10,000 in the last six years, making it more feasible for small businesses to obtain their own AFSL.
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