Professional Indemnity Insurance Costs – Boutique Financial Planners vs Dealer Groups
There was an interesting article in Money Management regarding the soaring Professional Indemnity (P.I) cost for Financial Planners.
Our experience shows the Insurers that have withdrawn from the Financial Planning P.I. insurance market are mostly as a direct result of the massive quantum of Dealer Group claims rather than claims stemming from boutique licensees.
Prior to the GFC in 2007 / 08, Insurers unwisely chased and competed for the big premiums on offer from Dealer Groups. Premium rates of less than half a percent of revenue were the norm for a $ 20,000,000 Policy Limit whilst Dealer groups promoted the low cost of P.I insurance and extensive APL’s to attract Advisers.
Following the GFC the Insurers spent the next decade, given PI Insurance is written on a claims made basis, settling an enormous quantity of claims made against the Dealer Groups and their Advisers. The Insurers implemented portfolio changes in an attempt to improve loss ratios. However, the claims from the GFC kept coming including claims for inappropriate risk profiling, over gearing and product failures to name a few.
DUAL, Vero and Axis were the main Insurers involved during this period and have subsequently withdrawn from the market . When DUAL withdrew from the financial planning market our portfolio of clients placed with DUAL had a loss ratio of less than 10% year on year, however the Insurers combined loss ratio including dealer group was plus 200%.
Today, some of those dealer groups do not exist and the ones that do have significantly improved compliance, risk management, APL construction, client risk profiling procedures, vetting of new advisors and supervision of Advisors. However, the horse has already bolted so to speak, with the new Insurers hesitant to play given the past history, the recent Royal Commission and current COVID 19 crisis.
Unfortunately, for the well managed boutique firms, they have been dragged along for the ride in the wider risk pool. PI Insurance for vanilla boutique licencees (no funky products on the APL and limited margin lending) should be an attractive piece of business for an Insurer, however, potential new Insurers are gun shy based on the past dealer group PI claims carnage.
Following DUAL’s withdrawal from the market in 2014 we were able to find a couple of Insurers to work with us. These clients have remained continuously insured with these Insurers since 2014 and current renewal premium rates whilst higher than in 2014, are generally 1% to 2% of turnover, depending on the Policy Limit purchased.
We continue to find homes for a quality boutique practices and welcome new client inquiries. To find out more, please click here
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This article originally appeared on Everest Risk Group's Latest News and has been published here with permission.