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Angry IFAs throw PI in FSA&#39s face

The spiralling costs of professional indemnity insurance are sure to provoke concern among IFAs.

By most estimates, premiums have jumped by as much as 100 to 200 per cent over the last year. One of the key reasons cited by the PI underwriters is fears that the mortgage endowment review may escalate into another pension misselling crisis.

PI brokers say underwriters have always viewed IFAs as a risky group to underwrite as they represent more potential hazards than they are worth.

Added to this is the fact that there are only a few insurers left in the IFA PI market, all the rest having pulled out because they viewed their exposure as being too great or the profits too slim.

The main players are Chubb Insurance of Europe, which distributes exclusively through broker PYV; St Paul, which is a subsidiary of the big US insurer of the same name; Trenwick and five Lloyd&#39s syndicates which belong to the underwriting agency Magian.

This list was almost shortened last week but Magian managed to sign up a Lloyd&#39s syndicate to its basket of underwriters to replace Chubb, which had terminated its relationship with Magian for an exclusivity agreement with rival broker PYV at the end of January.

London broker Dickson Manchester&#39s Charles Manchester says: “You can count the number of underwriters who will write IFAs on one hand.”

This leaves IFAs in the uncomfortable position where they are forced to insure themselves through a market which is far from being competitive. In its defence, the PI market says the reason why IFAs&#39 premiums are escalating is twofold.

In the aftermath of September 11, insurance premiums of all kinds have risen and, given that many underwriters were exposed to the World Trade Centre, it is only natural that they will want to recoup their losses. They point out that, while IFAs may have seen an increase of nearly 200 per cent, PI premiums across all industries have gone up by an average of 50 per cent anyway.

Second, there are fears that the mortgage endowment review will become another crisis on the level of the pension review. Underwriters are therefore taking pre-emptive action because of fears that they will be exposed to massive losses if consumers are awarded large amounts of compensation.

Alexander Forbes PI broker division assistant director Russell Ennever says: “The real bottom line is that, if a big Lloyd&#39s syndicate is making huge potential losses, then everyone is going to suffer. IFAs are going to be no exception to that situation.”

Manchester says: “IFAs have come back to the PI trough a number of times over the years. If it were not for endowments, they would still be difficult because they have been appallingly unprofessional over the years.”

But IFAs and their representatives say these fears are largely unfounded, pointing to anecdotal evidence from trade bodies and providers suggesting that IFAs are less guilty of giving bad advice on endowments than direct sellers.

The Financial Ombudsman Service says it does not keep track of complaints that are related specifically to mortgage endowments. But its most recent figures suggest that IFAs represented around 10 per cent of complaints to the former PIA Ombudsman.

FOS spokeswoman Alison Hoyland says: “As far as I know, there is no reason to suggest that ratio has changed at all.”

This could mean PI underwriters are taking action against a risk which does not exist on the scale they fear. The FSA has said it has no intention of launching a full-scale retrospective review into the advice given on endowments but, apparently, this message has not got through to the PI market.

But, following a second series of letters that began going out to mortgage endowment holders in January, PI brokers and IFAs are accusing the FSA of practically encouraging consumers to launch formal complaints.

Magian underwriting agency director Bruce Heasman says: “IFAs are forced by their regulatory body to effectively invite claims by having to contact clients they may have sold a pension, FSAVC or mortgage endowment to in the past.”

The industry is hoping the FSA will take a more active role by entering into discussions with PI underwriters. Last June, Money Marketing reported that the regulator was looking at scrapping PI outright or at least lessening the burden on IFAs. So far, nothing has happened.

Aifa director of policy Fay Goddard says: “The regulator has to keep putting the message out to the market that they are not going to do a retrospective review along the lines of the pension review.”

IFA Kangley Financial Management managing director Geoff Kangley says: “There needs to be a far closer liaison between the regulator, the ombudsman and the PI insurers so the insurers have a better idea of the risks they are underwriting.”

Many IFAs believe this apparent inaction by the FSA is damaging the rates that IFAs are paying. Surrey-based IFA Informed Choice managing director Nick Bamford has seen his premiums almost double to nearly £5,000 a year. He says: “I wonder if the regulator understands the consequences it has on the PI insurance market through its constant reviews. There is a great need for the FSA to understand the consequences of its actions.”

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