IFAonline

Scott Sinclair

IFAs are being warned to brace themselves for a 50% hike in their Professional Indemnity (PI) insurance premiums next year as the market downturn shows little sign of abating.

The warning comes from PI underwriting giant Collegiate, which says the increase will reflect the "inevitable" rise in the number of claims against financial advisers during economic slumps.

London-based Collegiate, which has both underwriting and claims arms and says it insures more than 15% of the UK IFA population, says the number of claims it processes has doubled in the last 18 months

It also criticised some PI insurers, as well as trade associations and compliance providers, for being unclear about which exclusions some policies feature and "emphasising price above coverage"

Collegiate underwriting director Richard Turnbull says the correlation between investment performance and claim incidence is unsurprising, adding "it doesn't take a mathematician" to see what effect this will have on PI premiums.

"There are still some cheap insurers out there but my best guess would be that premium rates across all insurers have risen by an average of 50% [since the start of the recession]," he says. "They may rise by another 50% over the next 12 months."

A survey conducted by Professional Adviser in June suggested less than 10% had experienced a ‘considerable' hike in premiums this year compared with last.

However, a number of those who said prices had either slightly increased, were about the same or had fallen, admitted they had yet to renew their PI plans in 2009.

Richard Howells, intermediary sales director at Zurich UK Life and owner of Manchester-based IFA Rapport Financial Strategies, says some PI insurers may be concerned by the direction of the market and withdraw their offering.

"They might say: ‘We'll exit for three or four years and wait for things to calm down, or maybe we'll stay where we are but add a few more exclusions'," he says. "Without PI, IFAs have got to close the door."

PI insurance is designed to protect firms from the financial consequences of unsuitable advice beyond their capacity to provide cover for "general" errors and omissions.

But Collegiate's Turnbull says some PI providers are not doing enough to highlight their policy exclusions, and criticises advisers for picking cover based on price.

Key exclusions in most PI policies are insolvency and market fluctuation exclusions, both of which have taken on new significance in the wake of the collapses of Lehman Brothers last year and, more recently, Keydata.

"A number [of providers] have written policies cheaply but have not been highlighting their exclusions. I'd be a little bit worried if I was an IFA," Turnbull says. "But I don't think they are all that bothered. It is incredible some IFAs don't necessarily recommend the cheapest policies to their clients but do the opposite when choosing PI cover."

But Daniel Kelly, an associate with global PI broker Lockton, says he can understand why IFAs select cheaper policies. "Five or six years ago, PI cover was extremely expensive and the FSA had to issue waivers for some firms. But the market has softened since so prices have tumbled. I can fully understand why some advisers have taken advantage."

The FSA says the PI market "significantly hardened" in 2003 and it was forced to issue almost 1,000 waivers to firms that could not afford cover. But the introduction of the insurance mediation directive (IMD) in January 2005 ruled out any future possibility of waivers and demanded firms buy sufficient cover.

Last November, the FSA proposed firms with PI plans containing any exclusions may need to hold additional capital, dependant on their income, to cover the extra risk.

As an example, it said a firm with a relevant income of £4.7m and a PI policy with an excluded ‘business line' on which it advises, or has done so in the past, would need to hold additional capital resources of at least £67,000.

It says it received 102 responses to the consultation and will publish a policy statement in Q4 20