Professional indemnity insurance – how hard is the market for financial planners?

Sector specialist examines the current challenges

Professional indemnity insurance – how hard is the market for financial planners?

Professionals Risks

By Terry Gangcuangco

We all know it hasn’t been ‘a walk in the park’ of late when it comes to professional indemnity (PI) insurance – but just like the impact of the coronavirus crisis, some sectors are harder hit than others. Insurance Business spoke with Everest Risk Group director Robert Huntley (pictured) to understand how the market is treating financial planners of all sizes.

“With the smaller operations, and depending on what they do, 10 to 15% [premium] increase is a great result,” noted Huntley. “When you get to the larger operations with larger revenues, they’re buying higher limits in order to comply with ASIC’s (Australian Securities & Investments Commission) RG (Regulatory Guide) 126 minimum PI requirements and business model activities; the increases could be anywhere.”

The director – whose client portfolio predominantly consists of fund managers, stockbrokers, securities dealers, financial planners, corporate advisors, and accountants – said it’s the top end of the market with elevated limits that is taking a bit of a battering. According to Huntley, those who are purchasing lower limits aren’t suffering from capacity issues.

“Whereas the larger firms that are buying $20 million-plus limit, different story,” he explained. “And until capacity comes back into the market, you’re probably not going to see any real change. 

“With your private equity and investment managers, stockbrokers, venture capital, provided they’re not buying too high a limit, the market is not too bad. It’s the financial planning sector in the higher end – we call them dealer groups in which various entities operate under the same license – where finding primary insurers and excess layer insurers, is difficult.”

Huntley asserted that the primary layer underwriters are not going to put their ‘necks on the line’, given the track record over the past 10 years, while the excess layers come at a cost in the current market.

Talking from experience, he highlighted that the massive quantum of dealer group claims following the 2007-2008 global financial crisis (GFC), with the “long tail” nature of PI claims, had driven insurers to exit the financial planning PI space around six to seven years after the GFC – impacting well-managed boutique firms, which the Everest Risk Group shareholder believes “have been dragged along” as part of the wider risk pool.

“In the past few months we have received a reasonable spike in inquiry phone calls from authorised representatives (ARs) currently with dealer groups,” Huntley told Insurance Business. “They are considering starting their own AFSL (Australian financial services licence), based on the significantly higher premium costs being passed onto the ARs by the dealer groups, together with the higher policy excesses being applied. From a PI perspective, the grass is definitely greener on the boutique financial planners side of the fence, particularly in regard to policy excesses.”

When quizzed as to whether he sees the situation improving or worsening, Huntley said we might see a bit of a turn in the middle to late next year. The industry stalwart is of the view that if insurers in the lower end of the financial planning market continue their trend of becoming more profitable, this could give rise to new players looking to enter which will create some competition.

In terms of dealer groups, he went on to say: “I can’t see any real improvement for a number of years unless ASIC considers lowering the minimum policy limit requirements.”

Meanwhile, aside from the effect of the Royal Commission in relation to financial services, Huntley lamented that COVID-19 has added an “extra layer” of difficulty, leaving an already hard insurance market even harder.

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