The state of play for IFAs and PI
The professional indemnity market for IFAs continues to be in a state of flux.
In the last 18 months we have seen three high-profile insurers exit the IFA PI space – Dual Australia, Vero and most recently, Axis Speciality Australia (as a consequence of the Axis Australia branch being closed down). There has only been one notable entrant into the IFA PI market – Berkshire Hathaway Speciality.
This movement means the market for IFA PI continues to be tight, with the primary players in the space being Chubb, AIG, SURA Professional Risks, Catlin/XL, Berkshire Hathaway and CGU, with a handful of smaller underwriters who selectively support certain markets.
The exit of Dual, Vero and Axis Speciality means a large number of IFAs need to find a new home, with many former Axis Speciality clients being marketed well in advance of renewal in order to secure cover.
Unfortunately, the remaining insurers remain cautious when approached about new risks. Essentially, the remaining insurers are 'full' and not actively seeking to grow their IFA book. In short the state of play is that increasing demand for IFA PI insurance continues to outweigh the reducing supply of IFA PI insurance.
Further compounding the supply issues faced by IFAs is the fact that insurers, like all other businesses, must manage their own risk profile and balance their exposures to any one sector. This creates an unfortunate confluence for IFAs where many are now looking for a new home and there is little capacity or appetite given the past claims history for the sector as a whole.
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.
Here is a quick example of how insurers work:
Insurers look at their whole book of business in a sector (in our case the sector is IFAs) and if they have a portfolio of, say, $5 million of premium across 100 practices it only takes a handful of claims to potentially wipe out the insurer's profit from that portfolio. Insurers must take into account cost of capital, reinsurance costs, cost of underwriting, administration and broker commissions on the $5 million of premium. Insurers typically run to a 60/30/10 rule of thumb – that is, for every $1 in premium, they expect to pay 60 cents in claims and 30 cents in costs as outlined above, leaving 10 cents in profit or, in our example, $500K in EBIT.
Every year, within a portfolio of 100 IFA risks, one or two IFA practices will have $1 million-plus claims (negligence or fraud), and another five or six will have claims of between $100K and $500K. It takes very little variance in claims profile to exceed the 60 per cent threshold and destroy EBIT.
The unfortunate reality for IFAs is that because of the sums involved, when errors and omissions occur (even to the most diligent) the size of the claims can be large, hence a relatively small number of claims can have a profound impact on an insurer's appetite for new business and also premiums. The past seven years claims history for the sector has been particularly difficult for insurers; however, we are seeing a slowdown in large claims which is a positive sign for the future.
What can be done?
The first thing is, don't panic! Quality will always find a home.
What's important is to appoint a broker who genuinely specialises in IFA PI insurance. They will know the market, understand which insurers may have an appetite for your type of risk and then position you appropriately so that your firm is presented in the best light possible. A client often only gets one chance to present their business in the best possible light; if this opportunity is missed, then it can be difficult to retrieve your position, and as a consequence your insurance deal will be inferior. A specialist broker will have deep underwriter relationships and should be able to secure clear results that a general insurance broker (who may have one or two IFA clients) cannot.
If you have made a claim in the past this should not be a reason to think you cannot secure alternative terms. Your broker should be able to articulate to a prospective new insurer what happened in the past, why it happened and what steps were taken in the business to ensure it won't happen again. Once again, ensure your broker is a PI specialist who understands the operational context in which you work as this critical to ensuring your firm is presented in the best possible light at renewal.
In summary, PI for IFAs remains difficult (but not impossible) to place due to the limited market. Work closely with your broker on renewal and you may be pleasantly surprised.
Oscar Martinis is a senior partner at McDougall Kelly & Martinis Insurance Partners
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