ASIC's probe into professional indemnity insurance has found the market to be healthy – contrary to the beliefs of boutique licensees, who say it is difficult to find affordable and adequate cover.
In a report released yesterday, ASIC said PI insurance for financial advisers in Australia is "stable and generally available", minus some insurance policies that do not meet the requirements of RG 126.
The review was carried out between November 2014 and June 2015 in response to licensees' concerns that they are unable to secure PI cover at a reasonable cost and that there are "significant deficiencies" within the insurance available.
ASIC, however, determined the market to be "sound".
"We found that, like most areas of insurance, PI insurance is cyclical with reduced market capacity and significant premium increases in periods where insurers suffer poor profit ratios," the report states.
"There was such a period from late 2008 until 2014, as a result of the global financial crisis (GFC) and a number of significant failures of financial products and advice licensees.
"As we passed the seven-year anniversary of the GFC, however, market conditions improved. At the time of our inquiries, the market was stable with sufficient market capacity and flattening premiums."
Speaking to ifa, Boutique Financial Planners (BFP) president Dacian Moses said finding affordable PI cover is still a problem due to a lack of market competition.
He has also heard from BFP members that there is an issue with PI insurers not understanding the financial advice market and therefore being unable to accurately assess risks.
"I think the PI market is dysfunctional. There are only three or four players in the market, and it's essentially an oligopoly and they will charge what they can get away with," he said.
"What we need is more competition and more expertise in the underwriting departments in assessing risk."
The less-than-stellar reputation of financial advisers has also led to insurers remaining cautious, making it hard for honest advisers to secure insurance, said Oscar Martinis, senior partner at McDougall Kelly & Martinis Insurance Partners.
"Further compounding the supply issues faced by IFAs is that insurers like all other businesses must manage their own risk profile and balance their exposures to any one sector," Mr Martinis said in an ifa blog.
"Whilst the vast majority of IFAs run highly professional, well-managed and compliant businesses, from an insurance perspective, the majority of IFAs continue to pay for the sins of the minority."
ASIC found five areas within PI insurance where there are gaps between what is required in RG 126 and what the insurers are providing. These include defence costs; reinstatements; fraud and dishonesty cover; aggregation of claims; and lack of claim aggregation.
In one example, ASIC said that RG 126 states "PI insurance policies must not have the effect of excluding fraud and dishonesty by directors, employees and other representatives".
"We found the policies of two of the four insurers in our review did not provide the required fraud and dishonesty cover," ASIC said.
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