GSA manager professional risks Ryan Neary told ifa that the current uncertain economic outlook was causing the few PI insurers left in the Australian advice sector to reassess their appetite for risk when it came to equity exposure.
“There are five main insurers that are insuring planners at the moment, and out of those five you may have three that have had a terrible loss history on claims arising out of clients being invested into direct share portfolios, therefore their actuaries say they have to look more closely at this area,” Mr Neary said.
“They are looking at historical data and claims analytics, but also moving forward with COVID and what is happening to share prices in the majority of industries where large percentages have been wiped off the share price.
“Insurers are looking at their portfolio a lot more closely and saying the future doesn’t look that great in the economy because there’s so much uncertainty, therefore we do not want the risks we’re taking on to be overly leveraged in terms of equities either locally or overseas.”
Mr Neary said PI insurers would typically only allow 25 to 30 per cent of their portfolio in the advice sector to be practices with a lot of direct equity clients, meaning planners would have to jump through many more hoops in order to convince the insurer to take their business.
“We are starting the renewal process for clients about four months out whereas historically it’s been started two months out – the reason for that is identifying what insurers want to draw down into, and allowing clients to present to insurers why they have clients in direct shares and why they believe it’s a much better risk than having them in property or a managed portfolio,” he said.
Mr Neary said the PI market in general for planners was “the worst it’s been for 20 years”, with some practices seeing as much as a 250 per cent rise in premiums over the last two years.
“What that means is insurers have become a lot more selective of what business they can write and what types of risks they can deploy capital to,” he said.
“The average [premium] increase we’re seeing for planners is probably about 25 to 30 per cent, but we have seen increases over the past two years of up to 250 per cent, so it’s a broad range and it depends on how weighted you are in these areas that insurers deem to be problem areas.”
Mr Neary said practices that used MDAs and dealer groups with larger adviser footprints were also notoriously difficult to insure.
Can we interview Synchron and find out how they are going with renewing their professional indemnity insurance? How many AFCA complaints have been sustained? How many frauds compensated?
Having Best Interest Obligations with sub sections A to G saying you’ve considered or done “anything else” I suspect would not have helped either. It’s looking like the only financial planning jobs to be found will be working in a call centre for Hesta….and I’d be loathed to call that financial planning.
Sad … but probably true.
This ticking time bomb is a real issue for Independent Financial Advice in Australia. The issue here is also about the actual number of PI insurers actually decreasing, as well as lowering their risks. Grossly unfair that a firm like AMP is able to get their PI cover renewed due to scale and volume, but many small licensee’s are going to have to work hard. It’s clear evidence that those bodies falsely claiming to represent planners (tha’ts the FPA ) acts only for it’s beloved large licensee’s (the NAB & AMP etc etc ). If you renew you FPA membership, given they can’t even negotiate a FASEA extension in a Pandemic…. clearly you’re not a professional by supporting something claiming to be professional whilst getting payments from competing forces, both licensee’s and advisers..
This makes no sense. PI insurance doesn’t cover client losses. It covers fraudulent activity by the licensee or AR’s.
Peter, any claim via the Kangaroo Court AFCA does certainly cover client loss in almost every way. It’s no wonder the PI companies are scared off in the almost impossible odds stack against advisers if they get complaints
All clients have to do is cry wolf, and take it to AFCA. The Adviser is guilty until proven innocent.
Have seen this many times. In some cases due to another advise trying to get business. Sad but true, and i might add the cases i have seen have all eventually turned out in favour of the adviser.
Peter – what I think you meant to say is that AFCA typically does not compensate for consumer claimed losses due to “investment performance” or “market performance”. That is technically correct. The way plaintiff lawyers get around that exclusion is to claim that the adviser did not adequately warn clients about market risks. A consumer claim fashioned on that basis typically almost always wins. Part of the problem is that adviser’s risk warnings are often very poor.
It has long been held (since 2000) that simply saying that markets are volatile and can go “up and down” is inadequate. The specific consumer warning needs to be about the extent of the loss (-40% worst case in the past 20 years) or risk and probability of loss (number of negative return years in the past 20) – both these disclosures need to be in numeric or statistical terms that clear and are understandable by the average person.
One of the worst issues about the financial planning industry versus other industries (such as medicine) when it comes to PI is that typically claims arise during falling investment markets. That also causes the insurance companies claims reserves to also fall in value (a double blow). Hence the immediate adverse impact on future insurance coverage and cost of premiums.