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Captive audience

Let us start by stating the obvious – the PI crisis is the single most important issue the industry presently faces. That said, it is easy to forget that IFAs are not alone in experiencing massive professional indemnity insurance increases. This is a widespread problem.

After accounting scandals such as Enron and Equitable Life, accountants saw savage premium increases, with many firms left with no other choice but to flee the audit business altogether.

Lawyers have also recently seen 50 per cent upsurges, which is crippling with the demise of the solicitors&#39 PI mutual.

But it is the IFAs&#39 perceived high exposure to risk that has meant they have been hit the hardest, with premium increases reported by some to be as high as 1,000 per cent.

Unlike accountants, it would be impossible simply to ignore the advice that IFAs sometimes need to give, such as in the areas of split caps, mortgage endowments and FSAVCs, just to lower premiums.

If effective industrywide PI cover is to become a reality, long-term solutions need to be formulated now and at least this time it seems that the FSA has started off well in its attempt to formulate a strategy for dealing with the problem that includes consultation with IFAs.

Much praise has been directed at the FSA workshops held this month in Leeds, London and Edinburgh aimed at bringing IFAs together to debate possible strategies. Although the FSA is not ready to divulge the outcome of the workshops, it says they have been well received, with good feedback from IFAs.

Former Sofa chairman and Syndaxi director Robert Reid says: “The FSA should be congratulated on the way it is handling this issue. It is trying to understand the situation and do something about it. This is the first time it has ever really rolled its sleeves up and done some hard work.”

IFA Pearson Thompson director Nick Conyers attended the Leeds workshop and says he was encouraged by the FSA&#39s approach.

He says: “The workshops were a good forum for the industry. The input from IFAs has injected more creative thinking into the debate.”

But for some, past behaviour overshadows present performance. Informed Choice managing director and current Sofa chairman Nick Bamford says he is not convinced that the FSA is doing all it can to relieve the situation.

He says: “This crisis stems largely from the FSA&#39s inability to provide a definition of risk in the industry. If IFAs really represent a risk to the PI insurer, then this is the issue that the FSA needs to tackle.”

ABI spokeswoman Emma Grainge says: “PI insurers find it hard to understand risk and potential exposure among IFAs. This has caused a lack of capacity. I find it hard to believe that this can change until something is done about defining misselling and thus determining risk for PI insurers. The problem comes from a lack of definition in the market.”

The FSA says it is committed to providing a comprehensive definition of misselling. However, PI broker Collegiate managing director Tony Howe asserts that simply defining misselling will not resolve the issue.

He says: “There is no point buggering around with misselling. This will not instil any more confidence in PI insurers. What constitutes a claim or a circumstance is where the real definition needs to be made.”

The ABI and Aifa are leading the way with suggestions for solving the PI crisis. They say they are looking into the problem but cannot solve it by themselves, calling on IFAs, providers and the FSA to band together.

Aifa director general Paul Smee believes a properly run mutual is the best way of resolving the difficulties but he says proper planning and structure is the key.

He says: “For a mutual to work, it would need to be properly underwritten, unlike the solicitors&#39 mutual. There would need to be some sort of ultimate backing and it would need to be seen to have widespread support.”

Smee believes the only way ahead is for a commercially run mutual managed by PI specialists. But others feel this proposal will not work, with start-up costs being only the first of many hurdles that the idea would face.

Sofa managing director Brian Lawless says: “I do not think a lot of the industry mutual idea. It would be expensive to start up and difficult to run.”

Reid says: “There are key flaws to the mutual idea. I cannot see how a mutual would do us any more good in the present situation because, as an insurance product, it would still have to respond to the same market forces that present PI providers face.”

Another possible solution to the problem is commercial organisations becoming captive PI insurers for IFAs.

The FSA has had a number of formal applications from organisations looking to head down this route. However, the new entrant would still face the same problems as a mutual. Present economic conditions make it hard to believe that any new captives entering the market would have a different attitude to that of current PI insurers.

Lawless says: “The Government has to win back confidence with PI insurers. It abdicated all responsibility to financial services and reviews such as the hindsight pension review destroyed insurer confidence in the industry. Unless this is properly resolved, high premiums and limited capacity will become the norm.”

The FSA workshops have already yielded some interesting opinions. In Leeds, Nick Conyers pointed out that in many cases, the levels of excesses and premiums have become so high that they are well above the potential cost of most claims.

He says: “As IFAs, we have been stuffed by the insurance market – emasculated in our own sphere of influence. What we need is a solution that protects us and consumers but does not rely completely on the insurance market.”

His proposal, which has had widespread interest, was the creation of a separately identified sinking fund which would either have the capacity to cover claims in its own right or would be self-underwritten.

Reid also finds the idea intriguing. He says: “The problem with any insurance app-roach is that there is a beginning and an end. It has to be done year by year and at the end of every term, if the insurance has not been used, it is money down the drain.”


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