It has been a difficult year for IFAs, with professional indemnity cover going through the roof and the run-up to mortgage regulation adding to workloads.
Informed Choice managing director Nick Bamford says he is paying 12 times as much as he did two years ago for PI insurance, with an excess three times higher.
He says: “The average claim in the financial services world is half of our excess level. Apart from giving us catastrophe insurance, we are effectively paying a massive premium to self-insure. It does not matter what the FSA says, PI insurers see themselves as a
compensation scheme and are pricing their policies accordingly.”
Hamptons International Mortgages managing director Kevin Duffy says his PI cover has quadrupled while the June 2003 renewal period saw some firms facing 300 per cent hikes in cover.
Bamford, who is Sofa chairman, does not foresee PI premiums easing over the course of next year. He says: “The IFA sector has suffered in the last year. The worst of that suffering has been the PI debacle and that is unlikely to be resolved in 2004.
“Many of our members who run highly professional businesses are struggling with this problem. They are the very firms that the Government needs to deliver a solution to the savings problems of this country.”
Duffy, looking at the issue from a mortgage perspective, is more positive. He believes underwriters will realise that the risks on mortgages are far less than those for financial planning. He says:
“After mortgage regulation, the cost of PI insurance will come down.
This will mean that many brokers who have taken the appointed representative route will realise they could have been more
independent to start with and will become directly authorised.”
Aifa managing director Paul Smee is tentatively positive over the PI issue, pointing out that at least the FSA is engaging with the industry. He says the regulator is demonstrating a growing
flexibility in its thinking but adds that the answer has not yet been found.
Smee says: “It is very difficult to say when or even if the market will turn. But what we are now seeing is evidence of people looking for ways round PI insurance. We have to encourage this innovative thinking, we have to find ways round the problem.”
But he adds that the situation is still dire.
Business continues to look bright on the mortgage front despite a slow start. The war in Iraq subdued the housing market in the spring but Duffy says: “The year has been better than we thought it would be. There was talk about recession at the beginning of the year and a lot of doom and gloom around. But the property market went into overdrive in the summer and sustained this growth until mid-November.”
The cloud of statutory mortgage regulation looming on the horizon has turned out not to be as threatening as many had predicted.
Association of Mortgage Intermediaries vice-chairman Mark Mountney says: “Regulation is not going to be as fierce as we originally feared it would be. Costs will not be as severe and I think that a lot more intermediaries than was originally predicted will take on the challenge of becoming directly authorised.”
Duffy believes the mortgage industry is in good shape to meet the challenge of regulation but joins his voice to the many that have been warning recently about the dangers of joining certain networks.
He says: “There has been far too much scaremongering on the part of networks to persuade brokers to become appointed representatives.
Protection business is slightly up on this time last year, according to LifeSearch senior technical director Kevin Carr but he believes that the market needs less volatility on rates. This year has seen 43 rate changes from the 17 product providers in the market, which Carr describes as horrendous.
The price gap between reviewable and guaranteed critical-illness cover continues to widen. LifeSearch predicts that, within six months, a reviewable policy could be as much as 50 per cent cheaper than the equivalent guaranteed product.
Carr says: “We should prepare ourselves for change soon. Either guaranteed rates could simply become so expensive that they become unaffordable or the product itself may need to change to keep premiums down.”
This year also saw the end of significant rate cuts from life insurance providers while the number of providers continued to fall.
Three years ago, there were 35 in the market but now there are just 17.
Carr says over the last 12 years, life insurance had been getting notably cheaper, with increased competition and a massively buoyant mortgage market plus the fact that the impact of Aids has not materialised as expected.
But this year marks an end to these decreases and Carr says the price of life cover is starting to creep up. He points out that life insurance has become so cheap and margins so tight, that there just is not enough profit any more for the life companies.
Despite the volatility of the market Carr says people are still buying protection and he ends on an upbeat note. “The market is not broken yet and overall I would say that we are slightly up on last year.”
As for depolarisation, the issue continues to drag on with the situation much the same at the end of 2003 as it was at the end of 2002. Smee puts it succinctly: “As for depolarisation, we started the year waiting for a consultation document and we are ending the year in the same position.”