In January the Australian Securities and Investments Commission responded to questions on notice during a Parliamentary Joint Committee on Corporations and Financial Services hearing about ructions in the professional indemnity insurance market for financial advisers.
Queensland LNP MP Bert van Manen quizzed the regulator on its concerns about the current state of the PI Insurance market, how closely it is monitoring the situation and what it would do if it became apparent that some advice licensees could no longer obtain professional indemnity insurance. ASIC responded that
“There has also been some re-pricing of risks which has resulted in increases in premiums and excesses, and limits on the terms of cover.
ASIC is aware that these factors are causing difficulties for some participants. However, although for the most part, most licence applicants and renewing licensees appear to be able to obtain appropriate PI insurance. ASIC is aware that a very small number of licence applicants and licensees seeking to renew, are experiencing difficulties in obtaining adequate PI insurance cover, or finding it very expensive and exploring alternative arrangements.”
CoreData being CoreData, we thought we’d check it for ourselves. We found that while ASIC might have been taking a rosy view of the PI market (and verbatim responses from advisers certainly bore that out), the pain isn’t being felt uniformly across advisers and licensees.
Most licensees, own-AFSL firms and firms authorised by licensees have experienced a variety of issues, ranging from excessive premium increases to increased excess/deductibles, to new policy exclusions.
Around one in four respondents reported no issues with obtaining or renewing professional indemnity insurance. But elsewhere:
• 42.3 per cent reported an excessive increase in premiums
• 27.0 per cent reported an increase in excess or deductible
• 23.5 per cent reported an unexpected increase in premiums
• 20.4 per cent reported new exclusions (for example, “high-risk” investments)
• 11.9 per cent reported a decrease in limit of indemnity
Principals of non-own-AFSL firms typically had an experience quite close to the overall market average (except for in the area of new exclusions being added to policies), but licensees and principals of own-AFSL firms have experienced the market in distinctively different ways – for example:
• 58.3 per cent of licensees reported excessive premium increases
• 4.2 per cent of licensees experienced a decrease in the limit of indemnity
• 30.5 per cent of own-AFSL practice principals reported new exclusions added to policies
• 32.9 per cent of own-AFSL practice principals reported excessive premium increases
• 14.1 per cent of non-own-AFSL practice principals reported new exclusions added to policies
Capacity in the PI market in Australia is shrinking as claims experience deteriorates and as insurers withdraw from the market or deploy their capital to other, more profitable lines of business. Insurers who remain in the market are seeking to drive their PI books to profitability through mechanisms such as the premium increases and changes to coverage and terms outlined above.
PI insurance is fast becoming a point of differentiation between licensees, with those able to demonstrate strong risk controls, robust compliance processes and clean claims records emerging at pricing advantage, and in a position to pass those cost advantages on to advisers.
